Capital Budgeting-Asset Replacement Assignment (Math Problem Sample)
The Conch Republic Electronics mini-case will allow you to apply the cash flow models for evaluating capital decisions. You are in the role of a recent MBA graduate and have the ability to apply what you learn this week to a “real life” simulation.
Upon Completion of this mini-case, you will demonstrate your ability to:
•Apply the calculations for payback analysis of a capital project.
•Apply the calculations for profitability analysis of a capital project.
•Apply the calculations for a NPV analysis of a capital project.
•Apply the calculations for a IRR analysis of a capital project.
•Make an appropriate recommendation based on the facts presented
Case Study:
After you have completed the readings for chapter 10, you should be ready to complete this assignment. Return to the case study on p.341-342 of the text and reread it carefully. As you are thinking about your response, please remember that one thing about cases – usually the quick answer is not the correct one. You need to be able to decide what the issues at hand are and what information is really critical to giving the correct advice.
Use the questions at the end of the case for guidance, but remember you may add to your explanations. One thing that student’s tend to do with a case is bring in more information than what is needed – stick to the facts as presented in the case and the chapter readings.
Please prepare and submit a 1-3 page response including synthesis of chapter readings and applications to corporate organizational structure.
To receive full credit, for Mini-cases:
You are to answer the questions that are found at the end of each case in your textbook as clearly and succinctly as possible. You will be graded on the accuracy of your answers and the application of the proper support from text/class material. Please show any and all computations required since partial credit will be given for your work (when work is shown).even if the final answer is incorrect
Capital Budgeting-Asset Replacement Assignment
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Capital Budgeting- Asset Replacement Assignment
Incremental Initial Capital Outlay
Description
Cash price for new asset acquisition
Installation costs
Incremental net working capital (see working 1)
TOTAL
Amount $
35, 500,000
750,000
34,864,000
71,114,000
Incremental Savings/Benefits
Description
Year 1. 480x 74,000units- 310x 80,000 units
Year 2. 480x 95,000 units- 310 x 60,000 units
Year 3.480x 125,000 units
Year 4.480x 105,000 units
Year 5. 480x 80,000 units
TOTAL
Less Decremented benefits
Year 1. 80,000 units x 35
Year 2. 60,000 units x 35
Year 1& 2. 15,000 units x 310 x2
14,200,00
TOTAL INCREAMENTAL BENEFITS
Amount $
10, 720,000
29,000,000
60,000,000
50,400,000
38,400,000
188,520,000
(14, 200,000)
174, 320, 000
Incremental Operating Costs
Description
Year 1. 185x 74,000 units - 125x 80,000 units
Year 2. 185x 95,000 units- 125x 60,000 units
Year 3. 185x125,000 units
Year 4. 185x105,000 units
Year 5. 185x 80,000 units
TOTAL
Amount $
3, 690,000
10,075,000
23,125,000
19,425,000
14,800,000
74, 950,000
Incremental Earnings Before Interest and Tax (EBIT) = Incremental Benefits – Incremental Operating Costs. Therefore
$174, 320, 000- $74, 950,000= $ 99, 370, 000
Less incremental depreciation per annum (see working 2) $ (7,620,000)
$91, 750,000
Less Corporate Tax 35% of 91,750,000 (32,112,500)
$ 59,637,500
Add back incremental depreciation $ 7,620,000
Incremental Operating Cash flow $ 67,257,500
Incremental Salvage value $ 5, 400, 000
Incremental networking capital realized $34,864,000
Total Salvage cash $40,264,000
Treatments
Net Present Value
Total Salvage Cash flow + Operational Cash flow PVIFA (12%, 5 years)
$40,264,000+$ 67,257,500 x 3.605
$40,264,000+$242,463,287.5= $282,727,287.5
Decision Rule: Since the net present value of the project is positive, the firm should consider purchasing the asset to replace the current one (Baker, 2011; Ross, Weterfield, and Jordan, 2012).
Internal Rate of Return
IRR= L + (A-O) (H-L)
* -B)
Where L= lower rate, H= higher rate; A= positive PV, B=negative PV.
10 + (282,727,287.5- 0) (17-10)
(282,727,287.5- - 100,000,000)
10 + 5.2= 15.2%
Decision Rule: As the internal rate of return is greater than zero, the company should consider the purchase of the new technology as quite feasible (Baker, 2011).
Payback Period
Payback period = Initial Investment
Cash inflow per period
71,114,000 = 1. 06 = 1 year and 22 days.
67,257,500
Decision Rule: the management normally determines payback period in a single project. If the management considers that the payback period becomes less than 1 year and 22 days, the project will be feasible (Baker, 2011; Ross, Weterfield, and...
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