AMIS 525

Capital Budgeting Exercise

situation facts:
A company is considering an operating investment opportunity.
The investment would require an initial outlay of 49 [for a depreciable asset].
[assume salvage value of zero for tax depreciation]
For seven years a net inflow from operations of 20 is anticipated.
In year four an additional outlay of 10 is planned.
A terminal inflow of 5 is projected.
The company has a 12% opportunity rate of interest.
The tax rate is 30%.

project analysis with income taxes

depreciation tax saving treated separately
TF
t
0
1
2
3
4
5
6
7

At
-$49
$20
$20
$20
$10
$20
$20
$25

1, 2, 3, , 7

1.00000
0.70000
0.70000
0.70000
0.70000
0.70000
0.70000
0.70000

-$49
$14
$14
$14
$7
$14
$14
$18

$7 0.30000

$2.10

TVF
1 / ((1 + ir ) ^ t)
1.00000
0.89286
0.79719
0.71178
0.63552
0.56743
0.50663
0.45235

-$49.0000
$12.5000
$11.1607
$9.9649
$4.4486
$7.9440
$7.0928
$7.9161

4.56376

$9.5839

NPV
irr calculation not possible

tax rate

30.000%

$21.6111

ir

12.000%

project analysis with income taxes

depreciation tax saving treated yearly
initial
t
0
1
2
3
4
5
6
7

[depreciable]

operating irregular / depreciation

terminal

tax income

tax

-$49
$20
$20
$20
$20
$20
$20
$20

irr = 24.806%

1/9/2014

($10)

$5

tax rate

$7
$7
$7
$7
$7
$7
$7

net cash
[not depreciation]

$13
$13
$13
$3
$13
$13
$18

30.000%

202045579.xls.ms_office

$3.90
$3.90
$3.90
$0.90
$3.90
$3.90
$5.40

-$49.00
$16.10
$16.10
$16.10
$9.10
$16.10
$16.10
$19.60

TVF
1 / ((1 + ir ) ^ t)
1.00000
0.89286
0.79719
0.71178
0.63552
0.56743
0.50663
0.45235

-$49.0000
$14.3750
$12.8348
$11.4597
$5.7832
$9.1356
$8.1568
$8.8660

NPV

$21.6111

ir

12.000%