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    Capital Budgeting-Q1-Solution

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    ShubhamSood
    This project has an initial investment phase requiring $500,000, followed by a 5-year operating phase. Over the operating phase, revenue grows from $200,000 in year 1 to $292,820 in year 5. Depreciation of $90,000 is taken each year. After 5 years, the project yields a net loss of $14,000 from the sale of salvaged equipment. Working capital increases over time but is released in the terminal phase. The total operating cash flow over the lifetime of the project is $174,051.

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    Capital Budgeting-Q1-Solution

    Uploaded by

    ShubhamSood
    29 views1 page
    This project has an initial investment phase requiring $500,000, followed by a 5-year operating phase. Over the operating phase, revenue grows from $200,000 in year 1 to $292,820 in year 5. Depreciation of $90,000 is taken each year. After 5 years, the project yields a net loss of $14,000 from the sale of salvaged equipment. Working capital increases over time but is released in the terminal phase. The total operating cash flow over the lifetime of the project is $174,051.

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    capital budgeting-Q1-solution

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    This project has an initial investment phase requiring $500,000, followed by a 5-year operating phase. Over the operating phase, revenue grows from $200,000 in year 1 to $292,820 in year 5. Depreciation of $90,000 is taken each year. After 5 years, the project yields a net loss of $14,000 from the sale of salvaged equipment. Working capital increases over time but is released in the terminal phase. The total operating cash flow over the lifetime of the project is $174,051.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    29 views1 page

    Capital Budgeting-Q1-Solution

    Uploaded by

    ShubhamSood
    This project has an initial investment phase requiring $500,000, followed by a 5-year operating phase. Over the operating phase, revenue grows from $200,000 in year 1 to $292,820 in year 5. Depreciation of $90,000 is taken each year. After 5 years, the project yields a net loss of $14,000 from the sale of salvaged equipment. Working capital increases over time but is released in the terminal phase. The total operating cash flow over the lifetime of the project is $174,051.

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    © All Rights Reserved
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    of 1

    I.

    Initial Phase
    0
    a) Initial Investment 500000 this is cash outflow and will carry negative sign

    b) Depreciation schedule
    no. of years 5
    cost 500000
    salvage value 50000
    depreciation per y 90000
    year 0 1 2 3 4 5
    depreciation 0 90000 90000 90000 90000 90000

    c) Working capital schedule


    0 1 2 3 4 5
    Revenue/Sale 0 200000 220000 242000 266200 292820
    Working capital 40000 44000 48400 53240 58564
    Additional W.C. re 40000 4000 4400 4840 5324 this will be cash outflow as it is additional
    investment

    II. Operating Phase


    0 1 2 3 4 5
    Revenue 200000 220000 242000 266200 292820
    Cost 100000 110000 121000 133100 146410
    EBDIT 100000 110000 121000 133100 146410
    -depreciation 90000 90000 90000 90000 90000
    EBIT 10000 20000 31000 43100 56410
    -interest 0 0 0 0 0
    PBT 10000 20000 31000 43100 56410
    -tax@30% 3000 6000 9300 12930 16923
    PAT 7000 14000 21700 30170 39487
    if any cash flow is negative--> cash outflow, if
    OCF=PAT+depreciation 97000 104000 111700 120170 129487 positive-->cash inflow

    III. Terminal Phase 0 1 2 3 4 5


    a) Salvage value 50000
    Sale Value 30000
    Gain(+)/Loss(-) -20000
    tax on gain/loss -6000
    Net gain/loss -14000

    b) Release of working 0 1 2 3 4 5
    WC 58564 this is cash flow so will have positive sign

    Operating Cash flow of project


    0 1 2 3 4 5
    Initial investment -500000
    working capital -40000 -4000 -4400 -4840 -5324 0
    Cash from operating phase 97000 104000 111700 120170 129487
    terminal value -14000
    release of working capital 58564
    OCF -540000 93000 99600 106860 114846 174051

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