University of Sargodha

Assignment of corporate finance

Submitted to;
Sir Haroon Husain

Submitted by;
Tanzeela yasmeen

Roll no; MCOF19M020

Date; 31-01-2021
Old Machine
Current market price = 75000, 3 years old, original Price = 320,000
Book value = 86400, useful life remaining = 8 years, 5 Years property class, maintenance
cost annually = 4000
New Machine

Original Price = 500000, incremental cash inflow = 170,000

Salvage value = 70000, useful life remaining = 8 years, 5 Years property class,
maintenance cost annually = 1,000, repair of engine in year 5 = 10000, Defective cost
500 first year which may increase 500 per year,
Tax rate = 40 per cent
Additional cost:
Additional cash holding = 8000
Additional investment inventory = 4000
Concrete foundation of new machine = 1000
Training of new machine operator = 500
Shipping of new machine to plant site = 300

Electricity cost 800 units at the rate of 3 dollar per year and cost savings will decrease by
100 units per year.

5 Years MACRS = 20 %, 32%, 19.2%, 11.52 %, 11.52 %, 5.76%

Initial Cash Outflow
New machine price = 500,000
Old machine sale = 75,000
-------------
= 425,000
Additional cash holding 8000
Additional investment inventory 4000
Concrete foundation of new machine 1000
Training of new machine operator 500
Shipping of new machine to plant site 300
----------- = 13800
------------
= 438800
Tax shield
11400* 40/100 = 4560
-----------------
Net cash outflow = 434240
Years 0 1 2 3 4 5 6 7 8
Cash inflows (434240) 170,000 187,000 205700 226270 248897 273787 301165 331282

Inc. Maintenance (1000) (1500) (2000) (2500) (3000) (3500) (4000) (4500)
Engine overhaul (10000) (10000 (10000) (10000)
)
Electricity cost 2400 2100 1800 1500 1200 900 600 300
Inc. cost of 0 (500) (1000) (1500) (2000) (2500) (3000) (3500)
defects
Depreciation old 36864 36864 18432
Depreciation new 100260 160416 96250 57750 57750 28875
Inc. depreciation (63396) (123552) (77818) (57750) (57750) (28875)
Total 108004 63548 126682 166020 177347 229812 284765 313582
Tax rate 40% 43202 25419 50673 66408 70939 91925 113906 125433
Salvage 42000
Additional cash 8000
Additional 4000
investment
Inc. dep add back 63396 123552 77818 57750 57750 28875
Inc. cash inflows 128198 161681 153827 157362 164158 166762 170859 242149

CAMP = RF + b ( Rm – Rf )

= 0.20+1.2(0.18-0.20)

= 0.176

= 17.6%

WACC = (0.30)(0.12)(1-0.40) + (0.30)(0.13) + (0.40)(0.176)

WACC = 0.131

= 13.1%

 Securities w r wr
Debt 0,3 0,12 0,0216
preffered stock 0,3 0,13 0,039
common stock 0,4 0,176 0,0704
 Required rate of return 0,131

Cash outflows 434240

NPV = PV cash outflows – PV of cash inflows

 1) NPV ( net present value)
Year CF (1+0,131)^n Pv= CF/(1+r)^n
1 128198 1,131 113349
2 161681 1,279 126396
3 153827 1,447 106327
Cash outflows
4 157362 1,636 96172
434240
5 164158 1,851 88705
6 166762 2,093 79675 NPV = PV of cash
7 170859 2,367 72177 inflows – cash
8 242149 2,677 90444 outflows
PV of cash inflows 773246
NPV = 773246 - 434240

NPV = 339006

2) Payback period

Out flows Inflow year 1 Year 2 Year 3

434240 128198 161681 153827

2 year = 434240 – 128198 – 161681 = 144361

3rd year = 144361/153827 = 0.9384

Payback period = 2 + 0.9384 = 2.9 years

Payback period = 2 years 11 months

3) IRR ( internal rate of return)

= lower rate + ( difference in rate (+ve NPV/(+ve NPV + -ve NPV)

at 13% PV at 39% PV
Year CF (1+0,13)^n Pv= CF/(1+r)^n (1+0,39)^n Pv= CF/(1+r)^n
1 128198 1,130 113450 1,390 92229
 2 161681 1,277 126620 1,932 83681
3 153827 1,443 106610 2,686 57278
4 157362 1,630 96513 3,733 42154
5 164158 1,842 89098 5,189 31636
6 166762 2,082 80099 7,213 23121
7 170859 2,353 72625 10,025 17043
8 242149 2,658 91087 13,935 17377
  PV 776102   364519

NPV at 13% = 776102 – 434240

= 341862

NPV at 39% = 364519 – 434240

= -69721

IRR = lower rate + (difference in rate (+ve NPV/(+ve NPV + -ve NPV)
= 0.13 + (0.26 (341862 / (341862 + (-69721))
= 0.13 + (0.26(341862 / (411583)
= 0.13 + 0.21595
= 0.345
= 35%

4) Profitability index

= PV of cash inflows / PV of cash outflows

= 773246/ 434240
= 1.78 ( acceptable )

If NPV is positive then project will be accepted so this project is acceptable because of positive NPV and
internal rate of return is also high.

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