![]() ![]() A building would be bought at a cost of $12 million.Investments (all initial investments would occur on ): Fixed overhead costs (excluding depreciation) would be $5 million a year.Variable manufacturing costs would total 60% of sales.Annual sales brought by the new plant are estimated at $40 million.The project's estimated economic life is 4 years.The project is assumed to have the same risk as an average project so the 12% should be used as the hurdle rate. The marginal federal-plus-state tax rate is 40%.The plant would begin operations on, and the first operating cash flows would occur on (the company's policy is to assume that operating cash flows occur at the end of each year).is considering a project to build a new plant. Make the decision, using one or more of the following methods: IRR (or Modified IRR), NPV, Payback (or Discounted Payback).Estimate the terminal year after-tax cash flow.Notice that depreciation schedules affect taxable income, taxes paid, and annual after-tax cash flows. Estimate the annual after-tax operating cash flows.Estimate the initial investment outlay.There are four steps to be followed to make capital budgeting decisions (both for expansion and replacement): You also need to compare the revenue/cost/depreciation before and after the replacement to identify changes in these elements. That is, the cash flows relevant to an investing decision are the incremental cash flows: the cash flows the company realizes with the investment compared to the cash flows the company would realize without the investment. Specifically, in a replacement project, the cash flows from selling old assets should be used to offset the initial investment outlay. Replacement analysis involves the decision of whether or not to replace an existing asset with a new asset: the cash flows from the old asset must be considered in replacement decisions. These annual net cash flows, along with the project's cost of capital, are then plotted on a time line and used to calculate the project's NPV and IRR.Īn expansion project is one where a firm invests in new assets to increase sales. They include the after-tax salvage value of the fixed assets (adjusted for taxes if assets are not sold at book value), and the recovery of the net working capital.įor each year of the project's economic life, the net cash flow is determined as the sum of the cash flows from each of the three categories. Annual operating cash flows equal after-tax operating income plus depreciation. These are the incremental cash inflows over the project's economic life. operating cash flows over the project's life.It includes the up-front cost of fixed assets associated with the project plus any increase in net working capital. The incremental cash flows from a typical project can be classified into three categories: ![]()
0 Comments
Leave a Reply. |