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vc/ton 3 0
availabe commoditiy 1,735,000 1 90,000
y1 90,000 2 145,000
y2 145,000 3 240,000
y3 240,000 4 180,000
y4-y10 180,000 5 180,000
fixed cost annually 450,000 6 180,000
termination cost at y10 250,000 7 180,000
intial outlay 8 180,000
special equip 800,000 9 180,000
recoverable working cap 75,000 10 180,000
tax rate 30%
salvage value 40,000
useful life for tax puropose 7
annula dep charge 108,571.43 Year investing cf
wacc 18% 0 (875,000)
1
y10 investing cf 2
termination cost at y10 (250,000) 3
recoverable working cap 75,000 4
salvage value 40,000 5
sum (135,000) 6
7
8
9
10 (135,000)
gross profit fixed cost depreciation taxable profit tax expense net income
NPV
(428,274.55) Negative NPV therefore we should not invest in the project
tax savings cash flows
32,571.43 (106,428.57)
32,571.43 47,571.43
32,571.43 313,571.43
32,571.43 145,571.43
32,571.43 145,571.43
32,571.43 145,571.43
32,571.43 145,571.43
32,571.43 145,571.43
32,571.43 145,571.43
32,571.43 145,571.43
Q2
In capital budgeting, we assume that a firm would recover all of the working capital it invested
When might it not be valid?
This a reasonable assumption because working capital consist of the most liquid assets such as cash, receivables and
inventory becomes obosolete and has to written down or circumstances arise which make the receivables unrecove
What two pieces of information does the payback method provide that are absent from th
The payback period is the number of years it takes to recover the initial cost of investment. Unlike NPV and IRR it giv
is useful for firms with limited access to additional liquidity.