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HardModel

CHINOMATERIALSYSTEMS
CapitalBudgetingDecisionMethods
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This case is designed as an introduction to capital budgeting methods.


NPV, IRR, MIRR, PI, and Payback are included in the analysis.

The model develops the project's cash flows on the basis of input cost
and savings data, then calculates the above decision criteria. Note
that this model was constructed specifically for this case, and hence
project life and depreciation allowances are fixed. The spreadsheet
sheet NPV-PROF contains a graph of the NPV profiles and the sheet
MULTIPLE contains a graph of the multiple IRR project.
If you are using the student version of the model, the model
generating cells have been blanked out.
Before using the model, it is necessary to fill in the empty cells with the
appropriate formulas. Once this is done, the model is ready for use.

INPUTDATA: KEYOUTPUT:
Newsystem:
Delivered cost $285,000 NPV $0
Installation $18,000 IRR 0.00%
Salvage value $15,000 MIRR 0.00%
Annual savings $76,000 Payback 0.00
Tenure 8years PI 0.00

Case requires you to calculate NPV, IRR, MIRR, Payback, PI. Also it requires
you to develop the NPV profile, Sensitivity Analysis

Below model shows all the requirement in detail. Also it shows the NPV profile and NPV profile
chart in a separate sheet in this model

========== =============== ========== ========== ========== ============


INPUTDATA: KEYOUTPUT:
Newsystem:
Delivered cost $285,000 NPV $23,975
Installation $18,000 IRR 14.42%
Salvage value $15,000 MIRR 13.07%
Annual savings $76,000 Payback 4.28
PI 1.68
Oldsystem:
Current book value $0
Current market value $4,000
Removal cost $2,500

Otherdata:
Cost of capital 12.0%
Cost of borrowing 12.0%
Return for typical investments 12.0%
Tax rate 36.0%
========== =============== ========== ========== ========== ============
MODELGENERATEDDATA:
Cashflowsatt=0: Endofprojectcashflows:
Cost of new system $285,000 Salvage value ---->
Installation 18,000 SV tax
--------
Total cost $303,000 Total
--------
Proceeds from old equip $4,000 Depreciationinformation:
Tax on proceeds (1,440)
Removal cost (AT) (1,600) Depreciable basis:
--------
Net cash flow, old $960
--------
Net invest. outlay $302,040
========
Annualcashflows:
Deprn A.T. Cost
Year Tax saving Saving Net CF Cum CF
0 ($302,040) ($302,040)
1 $21,816 $48,640 $70,456 ($231,584)
2 $34,906 $48,640 $83,546 ($148,038)
3 $20,943 $48,640 $69,583 ($78,455)
4 $12,566 $48,640 $61,206 ($17,249)
5 $12,566 $48,640 $61,206 $43,957
6 $6,283 $48,640 $54,923 $98,880
7 $48,640 $48,640 $147,520
8 $48,640 $58,240 $205,760

NPV: $23,975 AnalysisofFirstShortTermProject:


IRR: 14.4% Cost ($150,000)
TV: $9,600 Year 1 CF $175,000
MIRR: 13.07% NPV $6,250
Payback: 4.28 IRR 16.7%
PI: 1.68 MIRR 16.7%
DataTableforeffectofcostsavings

Savings NPV IRR MIRR Payback PI


76,000 23,975 14.42% 13.07% 4.28 1.68
35,000 6.08% 7.50 0.99
50,000 9.02% 5.88 1.24
60,000 10.70% 5.14 1.41
70,000 12.23% 4.57 1.58
80,000 13.62% 4.11 1.75

DataTableforeffectofcostofcapital:
>
Cap Cost NPV IRR MIRR Payback PI
$23,975 14.42% 13.07% 4.28 1.68
8.0% 13.07% 4.28 1.68
9.0% 13.07% 4.28 1.68
10.0% 13.07% 4.28 1.68
11.0% 13.07% 4.28 1.68
12.0% 13.07% 4.28 1.68
13.0% 13.07% 4.28 1.68
14.0% 13.07% 4.28 1.68
15.0% 13.07% 4.28 1.68
16.0% 13.07% 4.28 1.68
17.0% 13.07% 4.28 1.68
18.0% 13.07% 4.28 1.68

DataTableforeffectoftaxrates(numbersfromsenstivityanalysis):

Tax rate NPV IRR MIRR Payback PI


$23,975 14.42% 13.07% 4.28 1.68
20.0% 14.16% 4.12 1.85
30.0% 13.49% 4.22 1.75
40.0% 12.79% 4.33 1.64
50.0% 12.06% 4.45 1.53
60.0% 11.30% 4.59 1.43

AnalysisoftheMultipleIRRProject:

Cap cost NPV Year CF


0 ($50,000)
23,975 1 $200,000
0% 2 ($160,000)
10%
20% NPV = $1,020
30% IRR(1) = 10.6%
40% IRR(2) = 189.4%
50%
60%
70%
80%
90%
100% the two IRRs.
110%
120%
130%
140%
150%
160%
170%
180%
190%
200%
210%
220%
230%
240%
250%
260%
270%
280%
290%
300%
310%
320%
330%

========== =============== ========== ========== ========== ============


==============
==============

ctcashflows:
$15,000
(5,400)
-----------
$9,600

information:

$303,000

ermProject: AnalysisofSecondShortTermProject:
Cost ($50,000)
Year 1 CF $200,000
Year 2 CF ($160,000)
NPV $1,020
IRR 10.6%
MIRR 12.3%
NPV of NPV of
short-term short-term
project 1 project 2
$6,250 $1,020
$12,037 ($1,989)
$10,550 ($1,183)
$9,091 ($413)
$7,658 $321
$6,250 $1,020
$4,867 $1,688
$3,509 $2,324
$2,174 $2,930
$862 $3,508
($427) $4,058
($1,695) $4,582
==============
END
FIGURE 1
NPV-PROFILES

$14,000

$12,000

$10,000
NPV

$8,000

$6,000

$4,000

$2,000

$0
1 2 3 4 5 6 7 8 9 10 11
($2,000)

($4,000)

COST OF CAPITAL

eight-year project one-year project


10 11
FIGURE 2
Multiple IRR Illustration

12

10
NPV

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Cost of Capital

NP
V
30 31 32 33 34