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Based on the inputs below prepare a capital budget analysis for this Base Case using the...

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Accounting

Based on the inputs below prepare a capital budget analysis forthis Base Case using the Net Present Value, Internal Rate ofReturn, Profitability Index and Payback in years methods,determining whether the project is feasible. Please show yourspreadsheet calculations and your final determinations of “go” or“no go” on the project.

Project Inputs:

WACC – Debt is 70% and Equity is 30% of this firm’s capitalstructure. Interest rate on the debt is 7.5%, firm’s tax rate is22%. Firm’s beta is 1.50, Risk Free Rate is 3.0%, Market ReturnRate is 9.0%.

Project Investment Outlay, Year 0 - $1,000,000

Project Investment Life – 10 years

Project Depreciation - $100,000 / year

Project Salvage Value - $30,000

Working Capital Base of Annual Sales – 10%

Expected inflation rate per year – 3.0%

Project Tax Rate – 30%

Units sold per year – 40,000

Selling Price per Unit, Year 1 - $40.00

Fixed operating costs per year excluding depreciation -$175,000

Manufacturing (Variable) costs per unit, Year 1 - $30.00

Answer & Explanation Solved by verified expert
4.0 Ratings (707 Votes)

Year 0 1 2 3 4 5 6 7 8 9 10
1.Units sold/yr. 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000
2.S.P./unit 40 41.2 42.436 43.70908 45.02035 46.37096 47.76209 49.19495 50.6708 52.1909
3.Total sales value(1*2) 1600000 1648000 1697440 1748363 1800814 1854839 1910484 1967798 2026832 2087637
Less:
4.Fixed opg. Costs/yr. -175000 -180250 -185658 -191227 -196964 -202873 -208959 -215228 -221685 -228335
5.Variable costs(30*40000) -1200000 -1236000 -1273080 -1311272 -1350611 -1391129 -1432863 -1475849 -1520124 -1565728
6.Depn. -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000
7.EBT(3+4+5+6) 125000 131750 138702.5 145863.6 153239.5 160836.7 168661.8 176721.6 185023.3 193574
8.Tax at 30%*EBT(7*30%) -37500 -39525 -41610.8 -43759.1 -45971.8 -48251 -50598.5 -53016.5 -55507 -58072.2
9.EAT(7-8) 87500 92225 97091.75 102104.5 107267.6 112585.7 118063.2 123705.1 129516.3 135502
10.Add Back :depn.(row 6) 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000
11.Operating cash flows(9+10) 187500 192225 197091.8 202104.5 207267.6 212585.7 218063.2 223705.1 229516.3 235502
CAPEX & WC cash flows
12.Investment outlay -1000000
13.After-tax salvage(30000*(1-30%)) 21000
14.Beginning W/C 0 160000 164800 169744 174836.3 180081.4 185483.9 191048.4 196779.8 202683.2 208764
15.Ending W/c(10%*Sales) 160000 164800 169744 174836.3 180081.4 185483.9 191048.4 196779.8 202683.2 208763.7 0
16.Change in w/c -160000 -4800 -4944 -5092.32 -5245.09 -5402.44 -5564.52 -5731.45 -5903.39 -6080.5 208764
17. Total CAPEX & WC cash flows(12+13+16) -1160000 -4800 -4944 -5092.32 -5245.09 -5402.44 -5564.52 -5731.45 -5903.39 -6080.5 229764
18. Total annual cash flows(11+17) -1160000 182700 187281 191999.4 196859.4 201865.2 207021.2 212331.8 217801.7 223435.8 465265
19.PV F at 7.7%(1/1.077^No.of yr.) 1 0.92851 0.86212 0.80048 0.74325 0.69012 0.64078 0.59496 0.55243 0.51293 0.47626
20.PV at 7.7%(18*19) -1160000 169637.9 161459 153692.6 146316.5 139310.2 132654 126329.6 120319.4 114607.1 221587
21. NPV(Sum of Row 20) 325913.1
-160000 -4456.82 -4262.33 -4076.32 -3898.43 -3728.31 -3565.6 -3410 -3261.19 -3118.87 99425.5
22.Profitability Index= 1+(NPV/Initial Investment) -94352.3
1+(325913/1000000)=
1.33
23.IRR(of row 18) 13%
24.Pay back in Yrs.
18. Total annual cash flows(11+17) -1160000 182700 187281 191999 196859 201865 207021 212332 217802 223436 465265
Cumulative cash flows -1160000 -977300 -790019 -598020 -401160 -199295 7726 220058 437860 661296 1126561
Payback period=
5+(199295/207021)=
5.96
Years
Summary
NPV 325913
PI 1.33
IRR 13%
Pay back in Yrs. 5.96
The project is highly feasible & hence recommended as its NPV is POSITIVE & PI > 1 , IRR> WACC,7.7%,& pays back with-in 6 years.

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