You are on page 1of 3

BWFF2023 FINANCIAL MANAGEMENT II

TOPIC 6: CASH FLOWS IN CAPITAL BUDGETING PROBLEM


INTEGRATIVE PROBLEM (ANSWER)
a. Initial Outlay in Year 0
i.

Net Working Capital (NWC)


Cutting Machine A = (Inventory + Account Receivable) Account Payable
= (10,000 + 15,000) 7,800 = RM 17,200
Cutting Machine B = (Inventory + Account Receivable) Account Payable
= (15,000 + 19,000) 10,000 = RM 24,000

ii. Sale Price = RM9,000


Book Value = Depreciable asset accumulated depreciation
= 20,000 (2,500 x 5 years)
= 20,000 12,500 = RM7,500
Capital gain = Sale Book Value = 9,000 7,500 = 1,500
Tax on capital gain = 1,500 x .34 = RM510
After-tax proceed = Sale Tax = 9,000 510 = RM8,490

Cost of machine
Transportation cost
Depreciable asset
Investment in NWC
After-tax proceed (sold an old machine)
Net Initial Outlay

Cutting Machine A
(RM)
26,000
5,000
31,000
17,200
(8,490)
39,710

Cutting Machine B
(RM)
32,000
9,000
41,000
24,000
(8,490)
56,510

b. Annual Cash Flows for Year 1-3


Depreciation Old Machine = 20,000/8 years = RM2,500
Depreciation New Machine:
Cutting Machine A = 31,000/3 = RM10,333.33
Cutting Machine B = 41,000/3 = 13,666.67

WRMAS

BWFF2023 FINANCIAL MANAGEMENT II

Cutting Machine A (RM)


Year 1
Year 2
Year 3
Revenue
Revenues of New Machine
Revenues of Old Machine
Increase in revenues (a)
Operating costs (b)
Depreciation
New Machine
Old Machine
Increase in depreciation (c)
Incremental EBT
[(a)-(c)-(b)]
(-) Tax on Incremental
EBT (34%)
Incremental EAT
(+) Depreciation reversal
Annual Cash Flows

Cutting Machine B (RM)


Year 1
Year 2
Year 3

24,000.00
15,000.00
9,000.00

26,000.00
15,000.00
11,000.00

30,000.00
15,000.00
15,000.00

25,000.00
15,000.00
10,000.00

30,000.00
15,000.00
15,000.00

45,000.00
15,000.00
30,000.00

1,000

1,000

1,000

2,000

2,000

2,000

10,333.33
2,500.00
7,833.33

10,333.33
2,500.00
7,833.33

10,333.33
2,500.00
7,833.33

13,666.67
2,500.00
11,166.67

13,666.67
2,500.00
11,166.67

13,666.67
2,500.00
11,166.67

166.67

2,166.67

6,166.67

(3,166.67)

1,833.33

16,833.33

56.67
110.00

736.67
1,430.00

2,096.67
4,070.00

(1,076.67)
(2,090.00)

623.33
1,210.00

5,723.33
11,110.00

7,833.33
7,943.33

7,833.33
9,263.33

7,833.33
11,903.33

11,166.67
9,076.67

11,166.67
12,376.67

11,166.67
22,276.67

c. The terminal value in Year 3


Cutting Machine A
(RM)

Cutting Machine B
(RM)

Salvage Value
SV of New Machine
SV of Old Machine
Increase in SV

4,100
3,000
1,100

6,500
3,000
3,500

Tax @ 34%
After-tax SV
Recapture of NWC
Terminal Cash Flow

374
726
17,200
17,926

1190
2,310
24,000
26,310

WRMAS

BWFF2023 FINANCIAL MANAGEMENT II


d. Net Present Value
Cutting Machine A
Year
Free Cash Flows
0
(39,710)
1
7,943.33
2
9,263.33
3
29,829.33
Total PV
NPV (Cutting Machine A)

Cutting Machine B
Year
Free Cash Flows
0
(56,510)
1
9,076.67
2
12,376.67
3
48,586.67
Total PV
NPV (Cutting Machine B)

PVIF @ 12 %

PV

0.8929
0.7972
0.7118

7,092.60
7,384.73
21,232.52
35,709.85

= 35,709.85 39,710
= RM(4,000.15)

PVIF @ 12 %

PV

0.8929
0.7972
0.7118

8,104.56
9,866.68
34,583.99
52,555.23

=52,555.23-56,510
= RM(3,954.77)

e. Topsider should not replace the old machine with the Cutting Machine A OR B because both
NPVs are negative.

WRMAS