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Capital Budgeting

This document presents financial projections for an investment over 9 years. It shows annual cash flows, depreciation tax shields, and proceeds from selling the asset in year 9. The net present value of the investment is calculated to be $92,191.32 using a discount rate of 10%. The payback period is 3.6 years and discounted payback period is 4.78 years.

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Angelo Villadores
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64 views20 pages

Capital Budgeting

This document presents financial projections for an investment over 9 years. It shows annual cash flows, depreciation tax shields, and proceeds from selling the asset in year 9. The net present value of the investment is calculated to be $92,191.32 using a discount rate of 10%. The payback period is 3.6 years and discounted payback period is 4.78 years.

Uploaded by

Angelo Villadores
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Year 1 14.

29%
Year 2 24.49%
Year 3 17.49%
Year 4 12.49%
Year 5 8.93%
Year 6 8.92%
Year 7 8.93%
Year 8 4.46%
At Time 0 / Inception
Initial Investment (125,000.00)
Inc in WC (25,000.00)
(150,000.00)

On-going 50,000.00
35,000.00

Dep Shield
1 5,358.75 5,358.75
2 9,183.75 9,183.75
3 6,558.75 6,558.75
4 4,683.75 4,683.75
5 3,348.75 3,348.75
6 3,345.00 3,345.00
7 3,348.75 3,348.75
8 1,672.50 1,672.50

Selling price
AT year 9/ Terminal Carrying amt
Return of WC 25,000.00 Income Gain on Sale
Disposal of the asset 7,000.00 Tax
32,000.00 Net Proceeds from Sale
10,000.00
-
10,000.00
3,000.00
7,000.00
0 1.00 2.00 3.00 4.00
Initial Investment (125,000.00)
Increase in WC (25,000.00)
On-going/annual cash flows 35,000.00 35,000.00 35,000.00 35,000.00
Dep Tax Shield 5,358.75 9,183.75 6,558.75 4,683.75
Disposal of asset
(150,000.00) 40,358.75 44,183.75 41,558.75 39,683.75

20,000.00 20,000.00 20,000.00 20,000.00


106,565.00 0.89 0.80 0.71 0.64
NPV (43,435.00)
5.00 6.00 7.00 8.00 9.00
0.12
25,000.00
35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
3,348.75 3,345.00 3,348.75 1,672.50 -
7,000.00
38,348.75 38,345.00 38,348.75 36,672.50 67,000.00

20,000.00 20,000.00 20,000.00 20,000.00 20,000.00


0.57 0.51 0.45 0.40 0.36 5.33
5.32825

5.32825
Example: AMC Petroleum, Inc., the oil wholesaler, plans to purchase an oil tanker that will cost $120,000 and will la
net income. The company’s tax rate is 35%, and it uses straight-line depreciation for both book and tax purposes. AM

Book Value Beg Yr Before Tax Annual Depreciation Before Tax Annual
Cash Flows Net Accounting
Income

120,000 60,000 20,000 40,000


100,000 55,000 20,000 35,000
80,000 50,000 20,000 30,000
60,000 45,000 20,000 25,000
40,000 40,000 20,000 20,000
20,000 35,000 20,000 15,000

Average

ARR
anker that will cost $120,000 and will last for 6 years. AMC estimates the following cash flows and annual
ion for both book and tax purposes. AMC anticipates no salvage value at the end of 6 years.

After Tax Annual


Net Accounting
Income

26,000
22,750
19,500
16,250
13,000
9,750
107,250
17,875
14.90%
29.79% 25%
30%
0 1.00 2.00 3.00 4.00
Initial Investment (125,000.00)
Increase in WC (25,000.00)
On-going/annual cash flows 35,000.00 35,000.00 35,000.00 35,000.00
Dep Tax Shield 5,358.75 9,183.75 6,558.75 4,683.75
Disposal of asset
Cash Flows (150,000.00) 40,358.75 44,183.75 41,558.75 39,683.75

Cumulative Cash flows (150,000.00) (109,641.25) (65,457.50) (23,898.75) 15,785.00


PVF @10% 1 0.91 0.83 0.75 0.68
(150,000.00) 36,689.77 36,515.50 31,223.70 27,104.54
Cumulative Discounted CF (150,000.00) (113,310.23) (76,794.73) (45,571.03) (18,466.49)

Payback period 3.6 0.60 4.00


Discounted Payback period 4.78 (0.78) 0.78
5.00 6.00 7.00 8.00 9.00
0.12
25,000.00
35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
3,348.75 3,345.00 3,348.75 1,672.50 -
7,000.00
38,348.75 38,345.00 38,348.75 36,672.50 67,000.00

54,133.75 92,478.75 130,827.50 167,500.00 234,500.00


0.62 0.56 0.51 0.47 0.42
23,811.56 21,644.75 19,678.97 17,107.99 28,414.54
5,345.06 26,989.82 46,668.79 63,776.78 92,191.32
Revenue 50,000.00 Revenue 50,000.00
Cost - ex depreciation 35,000.00 Cost - ex depreciation 35,000.00
Depreciation Depreciation 5,000.00
Operating Income 15,000.00 Operating Income 10,000.00
Tax @30% 4,500.00 (1,500.00) Tax @30% 3,000.00
Net Income 10,500.00 Net Income 7,000.00
Tax Shield 1,500.00 Depreciation 5,000.00
Cash flow for Cap Budg 12,000.00 Cash flow for Cap Budg 12,000.00
40,000.00
0 1 2
Initial Investment (125,000.00)
Working Capital (25,000.00)
On-going/annual cash flows 35,000.00 35,000.00
Dep Tax Shield 5,358.75 9,183.75
Disposal of asset
Total Cash flows for the year (150,000.00) 40,358.75 44,183.75

PV Factor of 1, @10% 1.00 0.9091 0.8264


Discounted Cash flow (150,000.00) 36,689.77 36,515.50
Cumulative Cashflow (150,000.00) (113,310.23) (76,794.73)

Initial Cash Outlay (150,000.00)


PV of all Cash flows 242,191.32
NPV 92,191.32

Initial Cash Outflow (150,000.00)


PV $242,191.32
92,191.32

PVF of Ordinary Annuity @ 10%, for 7 yrs4.868418817693


PVF of 1, @10% for 7 yrs 0.513158118231

PV
Yearly Cash Flow 20,000.00 97,368.38
Net proceeds form sale of truck yr 6 18,000.00 9,236.85
106,605.22
Initial Cost (100,000.00)
NPV 6,605.22
3 4 5 6 7 8 9

25,000.00
35,000.00 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
6,558.75 4,683.75 3,348.75 3,345.00 3,348.75 1,672.50 -
7,000.00
41,558.75 39,683.75 38,348.75 38,345.00 38,348.75 36,672.50 67,000.00

0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241


31,223.70 27,104.54 23,811.56 21,644.75 19,678.97 17,107.99 28,414.54
(45,571.03) (18,466.49) 5,345.06 26,989.82 46,668.79 63,776.78 92,191.32
0 1 2 3
Initial Investment (125,000.00)
Working Capital (25,000.00)
On-going/annual cash flows 35,000.00 35,000.00 35,000.00
Dep Tax Shield 5,358.75 9,183.75 6,558.75
Disposal of asset
Total Cash flows for the yea (150,000.00) 40,358.75 44,183.75 41,558.75

PV Factor of 1, @23.605% 1.00 0.8090 0.6545 0.5295


Discounted Cash flow (150,000.00) 32,651.39 28,919.48 22,006.67
Cumulative Cashflow (150,000.00) (117,348.61) (88,429.13) (66,422.46)

IRR 23.605067%

4.29

Cash Outlay (150,000.00)


PV of all Cash flows 150,000.30
NPV 0.30
4 5 6 7 8 9

25,000.00
35,000.00 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
4,683.75 3,348.75 3,345.00 3,348.75 1,672.50 -
7,000.00
39,683.75 38,348.75 38,345.00 38,348.75 36,672.50 67,000.00

0.4284 0.3466 0.2804 0.2269 0.1835 0.1485


17,000.77 13,291.41 10,752.08 8,699.59 6,730.58 9,948.34
(49,421.69) (36,130.28) (25,378.20) (16,678.61) (9,948.03) 0.30
0 1 2 3
Initial Investment (125,000.00)
Working Capital (25,000.00)
On-going/annual cash flows 35,000.00 35,000.00 35,000.00
Dep Tax Shield 5,358.75 9,183.75 6,558.75
Disposal of asset
Total Cash flows for the yea (150,000.00) 40,358.75 44,183.75 41,558.75

PV Factor of 1, @10% 1.00 0.9091 0.8264 0.7513


Discounted Cash flow (150,000.00) 36,689.77 36,515.50 31,223.70
Cumulative Cashflow (150,000.00) (113,310.23) (76,794.73) (45,571.03)

PV of all cash flows 242,191.32


Capital outlay 150,000.00

1.61

NPV 92,191.32
Abs of Capital 150,000.00 242,191.32
Capital Outlay 150,000.00 1.61 1.70
4 5 6 7 8 9

25,000.00
35,000.00 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
4,683.75 3,348.75 3,345.00 3,348.75 1,672.50 -
7,000.00
39,683.75 38,348.75 38,345.00 38,348.75 36,672.50 67,000.00

0.6830 0.6209 0.5645 0.5132 0.4665 0.4241


27,104.54 23,811.56 21,644.75 19,678.97 17,107.99 28,414.54
(18,466.49) 5,345.06 26,989.82 46,668.79 63,776.78 92,191.32
150,000.00
125,000.00

87,000.00
Yr Project A Project B Yr
0 (2,000,000.00) (250,000.00) 0
1 150,000.00 60,000.00 1
2 250,000.00 70,000.00 2
3 350,000.00 80,000.00 3
4 450,000.00 90,000.00 4
5 550,000.00 100,000.00
6 650,000.00 110,000.00 IRR
7 750,000.00 120,000.00
8 850,000.00 130,000.00
9 950,000.00 140,000.00
10 1,050,000.00 150,000.00

NPV @15% $391,967.83 $192,105.12


IRR 19.108% 31.738%
Project A Project B
(1,000,000.00) (1,000,000.00)
800,000.00 5,000.00
475,000.00 150,000.00
150,000.00 475,000.00
5,000.00 800,000.00

26.962% 11.018%

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