Description
Complete the following problems from Chapters 10-12 in Principles of Managerial Finance:
- Capital Budgeting Techniques: P10-2; P10-10; P10-16; P10-22
- Capital Budgeting Cash Flows: P11-3; P11-12
- Risk Refinements in Capital Budgeting: P12-2; P12-4
Use the Chapters 10-12 Excel resource (if needed) to complete the problem-set assignment in this topic.
Please show all work for each problem.
You are not required to submit this assignment to Turnitin
The Drillago Company
Calculation of the NPV, IRR, and the Payback
Facts of case:
maturity (n)
cost-of-capital (k)
Initial outlay (pv)
Year
0
1
2
3
4
5
6
7
8
9
10
10
0.13
15000000
Estimated
Cash
Outflows/Inflows
=-B7
600000
1000000
1000000
2000000
3000000
3500000
4000000
6000000
8000000
12000000
years
Excel function
Trial and error
NPV Technique
PV
=B12/(1+$B$6)^A12
=B13/(1+$B$6)^A13
=B14/(1+$B$6)^A14
=B15/(1+$B$6)^A15
=B16/(1+$B$6)^A16
=B17/(1+$B$6)^A17
=B18/(1+$B$6)^A18
=B19/(1+$B$6)^A19
=B20/(1+$B$6)^A20
=B21/(1+$B$6)^A21
=B22/(1+$B$6)^A22
=SUM(C12:C22)
Recap:
NPV
IRR
=C23
=E8
Payback
=H23
=IRR(B12:B22)
0.147630974
IRR Technique
PV
=B12/(1+$E$9)^A12
=B13/(1+$E$9)^A13
=B14/(1+$E$9)^A14
=B15/(1+$E$9)^A15
=B16/(1+$E$9)^A16
=B17/(1+$E$9)^A17
=B18/(1+$E$9)^A18
=B19/(1+$E$9)^A19
=B20/(1+$E$9)^A20
=B21/(1+$E$9)^A21
=B22/(1+$E$9)^A22
=SUM(E12:E22)
Payback Technique
=B12+B13
=G13+B14
=G14+B15
=G15+B16
=G16+B17
=G17+B18
=G18+B19
=G19+B20
=G20+B21
=G21+B22
=G19/B19
=A18+H19
Accept the project as the NPV > 0.
Approximately as it equates the NPV to Zero.
Accept the project as the IRR (14.76%) > Cost of Capital (13%)
years approximately
years
The Damon Corporation
Calculation of the Initial Investment
Installed cost of proposed machine
Cost of proposed machine
plus: Installation costs
Total installed cost – proposed
(depreciable value)
After-tax proceeds from sale of present machine
Proceeds from sale of present machine
less: Tax on sale of present machine
Total after-tax proceeds – present
$
145,000
15,000
$
70,000
14,080
Change in net working Capital
Initial investment
Tax on sale of old machine
cost of old machine
MACRS
year 1
20%
year 2
32%
year 3
19%
Book Value
Sale price of old machine
Gain on sale
Tax rate
Tax Expense
$ 120,000
$
$
$
$
24,000
38,400
22,800
34,800
70,000
35,200
40%
14,080
Change in Working Capital
Increase in receivables
increase in inventory
increase in payables
Net working capital
$ 160,000
$ 55,920
18,000
$ 122,080
$ 15,000
19,000
16,000
$ 18,000
Depreciation Expense for Proposed and Present
Machines for the Damon Corporation
Year
Cost
With proposed machine
1
$ 160,000
2
160,000
3
160,000
4
160,000
5
160,000
6
160,000
Total
With present machine
1
$ 120,000
2
120,000
3
120,000
4
5
6
Total
Applicable MACRS depreciation
Depreciation
20%
32%
19%
12%
12%
5%
100%
$32,000
51,200
30,400
19,200
19,200
8,000
$ 160,000
12%
12%
5%
$ 14,400
14,400
6,000
0
0
0
$ 34,800
Calculation of Operating Cash Inflows for Damon Corporation
Proposed and Present Machines
Year 1
With proposed machine
Earnings before depr. and int. and taxes
Depreciation
Earnings before interest and taxes
Taxes
Net operating profit after taxes
Depreciation
Operating cash inflows
With present machine
Earnings before depr. and int. and taxes
Depreciation
Earnings before interest and taxes
Taxes
Net operating profit after taxes
Depreciation
Operating cash inflows
Year 3
Year 4
$
105,000
#REF!
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$
110,000
#REF!
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$
120,000
#REF!
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$
120,000
#REF!
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$
95,000
#REF!
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#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
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#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
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40%
40%
Year 2
ation
Year 5
Year 6
$
120,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
The Damon Corporation
Calculation of the Terminal Cash Flow
After-tax proceeds from sale of proposed machine
Proceeds from sale of proposed machine
Book value as of end of year 5
Net gain
Tax on gain
Total after-tax proceeds – proposed
$ 24,000
8,000
$ 16,000
40%
6,400
After-tax proceeds from sale of present machine
Proceeds from sale of present machine
Book value as of end of year 5
Net gain
Tax on gain
Total after-tax proceeds – present
$ 8,000
0
$ 8,000
40%
3,200
$ 9,600
$ 4,800
Change in net working capital
#REF!
Terminal Cash Flow
#REF!
Mutually Exclusive Projects
Project Alpha
Annual
Cash
Year Outflow/Inflow
0
(5,500,000)
1
300,000
2
500,000
3
500,000
4
550,000
5
700,000
6
800,000
7
950,000
8
1,000,000
9
1,250,000
10
1,500,000
11
2,000,000
12
2,500,000
10%
PVIF
NPV
1.0000 $ (5,500,000)
0.9091
272,727
0.8264
413,223
0.7513
375,657
0.6830
375,657
0.6209
434,645
0.5645
451,579
0.5132
487,500
0.4665
466,507
0.4241
530,122
0.3855
578,315
0.3505
700,988
0.3186
796,577
$ 383,499
Project Beta
PVIFA
ANPV
Annual
Cash
10%
Year
Outflow/Inflow PVIF
0 (6,500,000) 1.0000
1
400,000
0.9091
2
600,000
0.8264
3
800,000
0.7513
4
1,100,000
0.6830
5
1,400,000
0.6209
6
2,000,000
0.5645
7
2,500,000
0.5132
8
2,000,000
0.4665
9
1,000,000
0.4241
6.8137
$
56,284
Reviewing the NPV’s calculated for the two mutually exclusive projects, we see that project Alpha would be pref
as Alpha has a NPV of $383,499 relative to the NPV of Beta which is $350,116.
However, when we compare these mutually exclusive projects on the basis of their respective ANPVs, project B
project Alpha because it provides the higher annualized net present value ($60,794 versus $56,284).
Project Beta
NPV
$ (6,500,000)
363,636
495,868
601,052
751,315
869,290
1,128,948
1,282,895
933,015
424,098
$ 350,116
PVIFA
ANPV
5.7590
$ 60,794
project Alpha would be preferred over project Beta
respective ANPVs, project Beta would be preferred over
4 versus $56,284).
Purchase answer to see full
attachment
Calculation of the NPV, IRR, and the Payback
Facts of case:
maturity (n)
cost-of-capital (k)
Initial outlay (pv)
Year
0
1
2
3
4
5
6
7
8
9
10
10
0.13
15000000
Estimated
Cash
Outflows/Inflows
=-B7
600000
1000000
1000000
2000000
3000000
3500000
4000000
6000000
8000000
12000000
years
Excel function
Trial and error
NPV Technique
PV
=B12/(1+$B$6)^A12
=B13/(1+$B$6)^A13
=B14/(1+$B$6)^A14
=B15/(1+$B$6)^A15
=B16/(1+$B$6)^A16
=B17/(1+$B$6)^A17
=B18/(1+$B$6)^A18
=B19/(1+$B$6)^A19
=B20/(1+$B$6)^A20
=B21/(1+$B$6)^A21
=B22/(1+$B$6)^A22
=SUM(C12:C22)
Recap:
NPV
IRR
=C23
=E8
Payback
=H23
=IRR(B12:B22)
0.147630974
IRR Technique
PV
=B12/(1+$E$9)^A12
=B13/(1+$E$9)^A13
=B14/(1+$E$9)^A14
=B15/(1+$E$9)^A15
=B16/(1+$E$9)^A16
=B17/(1+$E$9)^A17
=B18/(1+$E$9)^A18
=B19/(1+$E$9)^A19
=B20/(1+$E$9)^A20
=B21/(1+$E$9)^A21
=B22/(1+$E$9)^A22
=SUM(E12:E22)
Payback Technique
=B12+B13
=G13+B14
=G14+B15
=G15+B16
=G16+B17
=G17+B18
=G18+B19
=G19+B20
=G20+B21
=G21+B22
=G19/B19
=A18+H19
Accept the project as the NPV > 0.
Approximately as it equates the NPV to Zero.
Accept the project as the IRR (14.76%) > Cost of Capital (13%)
years approximately
years
The Damon Corporation
Calculation of the Initial Investment
Installed cost of proposed machine
Cost of proposed machine
plus: Installation costs
Total installed cost – proposed
(depreciable value)
After-tax proceeds from sale of present machine
Proceeds from sale of present machine
less: Tax on sale of present machine
Total after-tax proceeds – present
$
145,000
15,000
$
70,000
14,080
Change in net working Capital
Initial investment
Tax on sale of old machine
cost of old machine
MACRS
year 1
20%
year 2
32%
year 3
19%
Book Value
Sale price of old machine
Gain on sale
Tax rate
Tax Expense
$ 120,000
$
$
$
$
24,000
38,400
22,800
34,800
70,000
35,200
40%
14,080
Change in Working Capital
Increase in receivables
increase in inventory
increase in payables
Net working capital
$ 160,000
$ 55,920
18,000
$ 122,080
$ 15,000
19,000
16,000
$ 18,000
Depreciation Expense for Proposed and Present
Machines for the Damon Corporation
Year
Cost
With proposed machine
1
$ 160,000
2
160,000
3
160,000
4
160,000
5
160,000
6
160,000
Total
With present machine
1
$ 120,000
2
120,000
3
120,000
4
5
6
Total
Applicable MACRS depreciation
Depreciation
20%
32%
19%
12%
12%
5%
100%
$32,000
51,200
30,400
19,200
19,200
8,000
$ 160,000
12%
12%
5%
$ 14,400
14,400
6,000
0
0
0
$ 34,800
Calculation of Operating Cash Inflows for Damon Corporation
Proposed and Present Machines
Year 1
With proposed machine
Earnings before depr. and int. and taxes
Depreciation
Earnings before interest and taxes
Taxes
Net operating profit after taxes
Depreciation
Operating cash inflows
With present machine
Earnings before depr. and int. and taxes
Depreciation
Earnings before interest and taxes
Taxes
Net operating profit after taxes
Depreciation
Operating cash inflows
Year 3
Year 4
$
105,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
110,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
120,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
120,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
40%
40%
Year 2
ation
Year 5
Year 6
$
120,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
95,000
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
$
#REF!
#REF!
#REF!
#REF!
#REF!
#REF!
The Damon Corporation
Calculation of the Terminal Cash Flow
After-tax proceeds from sale of proposed machine
Proceeds from sale of proposed machine
Book value as of end of year 5
Net gain
Tax on gain
Total after-tax proceeds – proposed
$ 24,000
8,000
$ 16,000
40%
6,400
After-tax proceeds from sale of present machine
Proceeds from sale of present machine
Book value as of end of year 5
Net gain
Tax on gain
Total after-tax proceeds – present
$ 8,000
0
$ 8,000
40%
3,200
$ 9,600
$ 4,800
Change in net working capital
#REF!
Terminal Cash Flow
#REF!
Mutually Exclusive Projects
Project Alpha
Annual
Cash
Year Outflow/Inflow
0
(5,500,000)
1
300,000
2
500,000
3
500,000
4
550,000
5
700,000
6
800,000
7
950,000
8
1,000,000
9
1,250,000
10
1,500,000
11
2,000,000
12
2,500,000
10%
PVIF
NPV
1.0000 $ (5,500,000)
0.9091
272,727
0.8264
413,223
0.7513
375,657
0.6830
375,657
0.6209
434,645
0.5645
451,579
0.5132
487,500
0.4665
466,507
0.4241
530,122
0.3855
578,315
0.3505
700,988
0.3186
796,577
$ 383,499
Project Beta
PVIFA
ANPV
Annual
Cash
10%
Year
Outflow/Inflow PVIF
0 (6,500,000) 1.0000
1
400,000
0.9091
2
600,000
0.8264
3
800,000
0.7513
4
1,100,000
0.6830
5
1,400,000
0.6209
6
2,000,000
0.5645
7
2,500,000
0.5132
8
2,000,000
0.4665
9
1,000,000
0.4241
6.8137
$
56,284
Reviewing the NPV’s calculated for the two mutually exclusive projects, we see that project Alpha would be pref
as Alpha has a NPV of $383,499 relative to the NPV of Beta which is $350,116.
However, when we compare these mutually exclusive projects on the basis of their respective ANPVs, project B
project Alpha because it provides the higher annualized net present value ($60,794 versus $56,284).
Project Beta
NPV
$ (6,500,000)
363,636
495,868
601,052
751,315
869,290
1,128,948
1,282,895
933,015
424,098
$ 350,116
PVIFA
ANPV
5.7590
$ 60,794
project Alpha would be preferred over project Beta
respective ANPVs, project Beta would be preferred over
4 versus $56,284).
Purchase answer to see full
attachment
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