Capital Budgeting (CMA Part2-D)
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The document is about a dry cleaner looking to replace an old laundry machine with a bigger one. It provides costs associated with the new machine, revenues it will generate, tax rates, depreciation details over 4 years, and discount rates. Tables are included on present value of annuities and future amounts to help evaluate the investment using NPV and IRR.
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Capital Budgeting (CMA Part2-D)
- 9. Dry Cleaner Example A dry cleaner is looking to replace an old laundry machine with a bigger one. Openthinkingacademy.com
- 10. The cost of new machine is $3000 and shipment cost is $200. This will reduced working capital by $500. The old machine can be sold for $1000 and generate $500 in profit. (Tax rate is 40%) Openthinkingacademy.com
- 11. The new laundry machine will generate an additional $1400 a year and it will add additional cost of $200. The total cost of the new machine ($3200) will be depreciated over 4 years (Salvage value after 4 years will be $400). (Tax rate is 40%) Openthinkingacademy.com
- 12. The new laundry machine can be sold after 4 years for $900 (Book value will be $400). This increase the working capital by $500 (Tax rate is 40%). Openthinkingacademy.com
- 15. Required rate of return, Discount Rate or Cost of Capital is 8% over 4 years P r e s e n t V a l u e A n n u i t y Ta b l e Openthinkingacademy.com
- 16. Required rate of return, Discount Rate or Cost of Capital is 8% over 4 years P r e s e n t V a l u e Ta b l e o f a S i n g l e F u t u r e A m o u n t Openthinkingacademy.com
- 22. 9.5% P r e s e n t V a l u e A n n u i t y Ta b l e Openthinkingacademy.com
- 23. NPV IRR Measure $ Amount % of return Consider Time value of Money Evaluate projects with different required rate of returns Discount rate/ Reinvestment rate Required rate of IRR rate return Openthinkingacademy.com
- 24. Which project would you select? Invest $1 Get $2 NPV = $1 Invest $100 Get $150 NPV = $50 The project with greatest NPV not largest IRR will add more value to the company Openthinkingacademy.com
- 25. Simple Payback Method: -‐ Even cash flows: -‐ Uneven cash flows: Discounted Payback Method: Openthinkingacademy.com
- 26. Ignore Time Ignore cash flow Biased toward Value of Money beyond cutoff date Short-‐term Projects Openthinkingacademy.com
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