Module 13B
                                      EXPANSION PROJECT

OBJECTIVE:
A very basic capital budgeting example invo...
Initial Investment                                   -100000
Present value of revenues                   181101
Present va...
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Mod13 bv3

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Mod13 bv3

  1. 1. Module 13B EXPANSION PROJECT OBJECTIVE: A very basic capital budgeting example involves an expansion proposal, for example, the purchase of an additional machine to increase production or the expansion of an existing plant. This program will determine the present value of such a project. INPUTS (will appear in blue): The following inputs are required: initial investment (D30), depreciation life (D31), project life (D32), end of life salvage value (D33), cost of capital (D34), additional working capital required at beginning of project (H30), working capital returned at end of project (H31) and the tax rate in decimals (H33). In addition, the annual inflows and outflows should be entered in cells F37-F46 and cells G37-G46. The project life, depreciation life and all cash flows can have a duration of up to ten years. No provision has been made for a tax loss, if the returned working capital is less than the original investment in working capital. NOTE: Book value at the end of the project is not entered. It will be generated internally, based on the relationship between depreciation life and project life. The two lives do not have to be equal. CAPITAL BUDGETING -- EXPANSION -- SL DEPRECIATION Sample data have been entered as an example. DATA Initial Investment 100000 Additional WC 20000 Depreciation life 5 Returned WC 20000 Project life 4 Book value at end 20000 Salvage value 10000 Tax rate (decimals) 34.0% Cost of capital (decimals) 10.0% Annual Cash Flows Revenue Expense Year 1 50000 30000 Year 2 60000 30000 Year 3 60000 25000 Year 4 60000 25000 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
  2. 2. Initial Investment -100000 Present value of revenues 181101 Present value of expenses 87924 Present value of contribution (after tax) 61497 Present value of depreciation shield 21555 Present value of salvage 9152 Additional working capital -20000 Return of working capital 13660 Net present value -14136

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