FINA 3313 FR ONLY
Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10 years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,100 hours?
$19,000 Annual Depreciation = (Cost - Residual Value) / Useful Life = ($220,000 - $30,000) / 10= $19,000--- ANSWER
What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?
**EQUIVALENT ANNUAL COST= PMT SO CFO AND CO1 WILL BE NEGATIVE** CF0=-50,000 CO1=-10,000 FO1=4 I=10% CPT NPV NPV=-81,698.65 PV= -81,698.65 FV= 0 N=4 I=10% CPT PMT PMT=25,773.54-----ANSWER
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign
CF0= -100,000,000 (NEGATIVE BC "MUST SPEND IMMEDIATELY) CO1= -20,000,000 (NEGATIVE BC "MUST SPEND IMMEDIATELY) FO1= 1 CO2= 80,000,000 FO2= 1 CO3= 90,000,000 I= 11% CPT IRR= 15.95%--- ANSWER
A company just paid 10 USD million for a feasibility study. If the company goes ahead with the project, it must immediately spend another 100 USD million now, and then spend 20 USD million in one year. In two years it will receive 80 USD million, and in three years it will receive 90 USD million. If the cost of capital for the project is 11 percent, what are the project's NPV and IRR?
CF0= -100,000,000 (NEGATIVE BC "MUST SPEND IMMEDIATELY) CO1= -20,000,000 (NEGATIVE BC "MUST SPEND IMMEDIATELY) FO1= 1 CO2= 80,000,000 FO2= 1 CO3= 90,000,000 I= 11% CPT NPV= 12,720,000.00 CPT IRR= 15.95% A. NPV = $12.72 million; IRR = 15.95%. (OR 16% depending on rounding)--- ANSWER
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $86,510,569 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?
CFo= -86,510,569 (NEGATIVE BC "MUST SPEND IMMEDIATELY) CO1= -20,000,000 (NEGATIVE BC "MUST SPEND IMMEDIATELY) FO1= 1 CO2= 80,000,000 FO2= 1 CO3= 90,000,000 I= 11% CPT NPV= 26,208,432--- ANSWER
What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 7.37%?
Solution: CFo= -100,000 CO1= 50,000 FO1= 3 (Years) I= 7.37 % CPT NPV = $30,333.81--- ANSWER The NPV is positive so we accept the project.
What is the net effect on a firm's working capital if a new project requires: $46,986 increase in inventory, $36,173 increase in accounts receivable, $35,000.00 increase in machinery, and a $48,873 increase in accounts payable? Round to nearest dollar amount.
working capital= current assets-current liabilities Accounts Receivable: $36,173 Inventory: $46,986 Accounts Payable: $48,873 *Accounts receivable and Inventory are current assets while accounts payable are current liabilities* $36,173 + $46,986- $48,873= $ 34,286--- ANSWER
Suppose the capital budget in the lecture example worksheet in Video #11 was $100,000. What is the NPV of the best project(s)?
year 0 =45,000--- ANSWER
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject todepreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What are the after tax proceeds from the sale of the factory (i.e., ATSV)? Round to nearest whole dollar value.
ATSV= 4,500,000 What the land will be sold as **Usually ATSV= SV-Tax*(SV-BV)**
What is the equivalent annual cost for a project that requires a 40,000 usd investment at time-period zero, and a 10,000 usd annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?
CF0= -40,000 CO1= -10,000 FO1= 4 I= 10% CPT NPV= -71,968.65 PV= -71,968.65 FV= 0 N= 4 I= 10% CPT PMT= 22,704.01.
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,510,761. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject todepreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the project's NPV? Round to nearest whole dollar value.
CF0= -Market Value of land-cost- NWC CF0= -2,510,761 -20,000,000 -3,000,000 =25,520,761 CF0= -25,510,761 CO1= 3,212,500 FO1= 9 CO2= OCF+ATSV+NWC CO2=3,212,500+4,500,000+3,000,000= 10,712,500 CO2= 10,712,500 FO2=1 I= 10% CPT NPV= -2,879,765.50---- ANSWER
You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year. A. B. C. 0. $(1,000) $(5,000). $(50,000) 1. $ 300. $ 1,700. $ 0 2. $300. $ 1,700. $15,000 3. $ 600. $1,700. $ 28,500 4. $300. $1,700. $ 33,000 What is the IRR of the best project? % terms to 2 decimal places w/o % sign
Project A. Project B. Project C. Difference CFo= -1,000. -5,000. -50,000. -54,000 CO1= 300. 1,700. 0. -1,400 CO2= 300. 1,700. 15,000. 13,600 CO3= 600. 1,700. 28,500. 27,400 CO4= 300. 1,700. 33,000. 31,600 IRR= 17.49%. 13.54%. 14.23%. 8.82% The crossover rate is 8.82% therefore when the discount rate (14%) is greater than the crossover rate (8.82%), the IRR gives the correct decision about which project to accept IRR of the best project is project C Solution: 14.23% because it is closest to the required rate of return of 14%?????---ANSWER
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $22,367,744 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes) .0 What is the project's outflow at t=0? Answer to the nearest whole dollar value
Project cash outflow = Current market value of land + Project initial cost = $2,600,000 + $22,367,744= $24,967,744 --- ANSWER Note: - Amount spend after marketing study is sunk cost and will not be considered - Current value of land is opportunity cost so it should be included (If land is not used in this project it could be sold in market) hence selling price of land is Opportunity cost
Q1. Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $33,599 2 $40,000 3 $20,000 4 $10,000 Thereafter $ 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount. Q2. What is the amount of the operating cash flow for a firm with $303,516 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?
Revenue = $33,599 Expenses= (.50*$33,599)= -16,799.5 Depreciation= (40,000*0.20)=. -8,000 = EBIT 33,599-16,799.5-8,000= 8,799.5 Tax= 8,799.5*.20= -1,759.9 NI (Net Income)= 8,799.5-1,759.9= 7,039.6 Depreciation=. 40,000/5= +8,000 =OCF 7,039.6+8,000= 15,039.6 OCF for year 1= 15,040--- ANSWER Q1 Q2. Operating cash flows = Profit before tax x ( 1 - T ) + Depreciation 303,516*(1-0.35)+100,000= 297,285.4--- ANSWER Q2
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the operating cash flow @ t=1? Round to nearest whole dollar value
Revenue= 8,000,000 -Expenses= 4,000,000 Depreciation= -1,750,000 =EBT 2,250,000 -Tax. (EBT * TAX)= (2,250,000*0.35)= 787,500 =NI (EBT-TAX) 2,250,000-787,500= 1,462,500 + Depreciation 1,750,000 = OCF. 3,212,500--- ANSWER Depreciation = (Initial Cost-Salvage Value)/# of years = 20,000,000-(4,500,000-2,000,000) = (20,000,000-2,500,000)/10= 1,750,000
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject todepreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the operating cash flow @ t=2? Round to nearest whole dollar value.
SAME AS T=1 Revenue= 8,000,000 -Expenses= 4,000,000 Depreciation= -1,750,000 =EBT 2,250,000 -Tax. EBT*Tax (2,250,000*0.35)= 787,500 =NI (Net Income) 2,250,000-787,500= 1,462,500 + Depreciation 1,750,000 = OCF. 3,212,500-- ANSWER
Example 5: You purchase a truck for $30,000 and depreciate it using the 3-year MACRS percentages. If you actually sell of after the third year for $12,000 in salvage value then what is the after-tax salvage value? The tax rate is 20%
Solution 5: Depreciation expense for year i = (initial cost)(MACRS percentage for year i) Depreciation expense for year 1 = (30000)(0.3333) = $9,999 Depreciation expense for year 2 = (30000)(0.4444) = $13,332 Depreciation expense for year 3 = (30000)(0.1482) = $4,446 Accumulated depreciation = 9,999 + 13,332 + 4,446 = 27,777. Book value = initial cost - accumulated depreciation = 30,000 - 27,777 = $2,223 After-tax salvage value = salvage value-T(salvage value - book value) = 12,000-.2(12,000-2,223) = 12,000-(.2)(9,777) = 12,000-1,955 = $10,045.--- ANSWER The firm would end up paying taxes of $1,955 on the salvage value of $12,000, so the after-tax salvage value would be $10,045.
What is the profitability index for Project A with a cost of capital of 8%? Year. Project A. Project B 0 ($42,000.00). ($45,000.00) 1. $14,000 $28,000 2. $14,000 $12,000 3. $14,000 $10,000 4 $14,000 $10,000 5 $14,000 $10,000
Solution: CFo= -42,000 CO1= 14,000 FO1= 5 years I= 8% CPT NPV= 13,897.94 PI (Project A) = 42,000+13,897.94/42,000= 1.33--ANSWER PI (Project B)= 45,000+ 13,308.44/45,000= 1.30 We would accept both probabilities because they are greater than 1
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $397 at the end of the next three years and then $1,750 per year for the three years after that. If the discount rate is 4.8% then what is the NPV?
Solution: CFo= -5,000 CO1= 397 FO1= 3 CO2= 1,750 FO2= 3 I= 4.8% CPT NPV = $241.15--- ANSWER The NPV is positive so we accept the project.
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format
Solution: PI = NPV+CFo/CFo CFo= -5,000 CO1= 900 FO1= 3 CO2= 1,400 FO2= 3 I= 8% CPT NPV= 183.48 5,000+183.48/5,000= 1.0367 ***TO TURN INTO PERCENTAGE MULTIPLY BY 100 SO 1.0367*100= 103.67 IS -------THE ANSWER In this example, we would accept the project because the PI is greater than 1. As long as NPV is greater than zero, then it will always be the case that the PI is greater than one. Therefore the decision rule is to accept a project if the PI is greater than one and to reject if the PI is less than one. This will always give the same decision as using NPV.
Example 1: Your firm forecasts revenues of $80,000 next period and $50,000 in expenses. Depreciation expense is estimated to be $15,000 and the tax rate will be 20%. What are the forecasts for Net Income and Operating Cash Flow? There is no interest expense.
Solution: Revenue. 80,000 CGS. -50,000 Depreciation -15,000 EBT. 15,000 tax @ 20% (EBT*0.20) -3,000 NI. 12,000 (EBT-TAX) depreciation. + 15,000 OCF 27,000 (NI+Depreciation) Net Income is forecasted to be $12,000 and OCF is forecasted at $27,000.--- ANSWER
What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?
Solution: CFo= -10,000 CO1= 2,000 FO1= 6 CPT IRR = 5.47%.--- ANSWER * YOU HIT IRR TO COMPUTE NOT NPV* Notice that is was not necessary to input a discount rate to compute the IRR. Only the cash flows were required. However, we would need the discount rate now in order to decide about accepting or rejecting the project.
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy dayanyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject todepreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by$3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory(including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the total cash flow at t=10? Round to nearest whole dollar value.
TCF= OCF+ATSV+NWC Revenue= 8,000,000 -Expenses= 4,000,000 Depreciation= -1,750,000 =EBT 2,250,000 -Tax. EBT*Tax (2,250,000*0.35)= 787,500 =NI (Net Income) 1,462,500 + Depreciation 1,750,000 = OCF. 3,212,500 ATSV= 4,500,000 NWC= Current Assets-Current Liabilities NWC= Inventory+Accounts Receivable-Accounts Payable NWC= 3,500,000+1,500,000-2,000,000= 3,000,000 TCF= 3,212,500+4,500,000+3,000,000= 10,712,500
Grill Master Johnnys is thinking about purchasing a new, energy-efficient grill. The grill will cost $53,000.00 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750.00. The grill will have no effect on revenues but will save Johnny's $23,500.00 per year in energy expenses. The tax rate is 40%. The 3-year MACRS schedule: Year Depreciation % 1 33.33% 2 44.45% 3 14.81% 4 7.41% What is the total cash flow in year 3?
Tax= 14.81% Initial investment:-53,000 Depreciation: YEAR 1 53,000*33.33%= $ 17,664.90 YEAR 2 53,000*44.45%= $ 23,558.50 YEAR 3 53,000*14.81%= $ 7,849.30 SV: 11,750 Saving: 23,500 Revenues; $ 23,500.00 COGS Depreciation:$ 7,849.30 EBIT $ 15,650.70---(23,500-7,849.30) Tax $ 6,260.28---(15,650.70*.40) NI $ 9,390.42----(15,650.70-6,260.28) Depreciation $ 7,849.30 OCF$ 17,239.72---(9,390.42+ 7,849.30) BV= initial cost- accumulated depreciation BV=53,000-(SUM of $17,664.90+$23,558.50+$7,849.30) BV= $ 3,927.30 ATSV=SV-tax*(SV-BV) ATSV=11,750-0.40*(11,750-3,927.30) ATSV= $ 8,620.92 Total Cash Flow= OCF+ATSV Total cash flow= 17,239.72+8,620.92 ----ANSWER= $ 25,860.64
Compute the payback period for a project that requires an initial outlay of $164,766 that is expected to generate $40,000 per year for 9 years.
Year CF. Cumulative Net CF 0. -164,766 -164,766-0= -164,766 1. 40,000 -164,766+40,000= -124,766 2. 40,000 -124,766+40,000= -84,766 3. 40,000 -84,766+40,000= -44,766 4. 40,000 -44,766+40,000= -4,766 5. 40,000 -4,766+40,000= 35,234 6. 40,000 35,234+40,000= 75,234 7. 40,000 75,234+40,000= 115,234 8. 40,000 115,234+40,000= 155,234 9 40,000 155,234+40,000= 195,234 From the table above we can see that the cumulative net CFs turn positive between years 4 and 5. Therefore the payback period will be 4 whole years plus some fraction of the fifth year. The fractional amount of the fifth year will be: Fractional amount of last year: Additional CF needed in next year to break even/total cash flow in next year= 4,766/40,000=0.12 So it will take 4 whole years, plus 0.12 of the last year to break even. Payback period = number of whole years +(Additional CF needed in next year to break even/total cash flow in next year) =4+0.12= 4.12--- ANSWER So it takes 4.12 years to break even, or to recover the initial investment for this project. We could multiple 0.12 times the number of days in the year to get a more precise calendar figure of how long it takes: (0.12)(365) = 43.8 So it takes 4 years and 43.8 days for "payback".
