Explore BrainMass
Share

# Capital budgeting

I am attempting these problems and the book is confusing me and it only shows examples of how to calculate these using a financial calculator and I do not have one, is there another way to solving these that someone can show me.

(NPV and shareholder wealth) Stockholders are surprised to learn that the firm has invested \$43 million in a project that has an expected payoff of \$8 million per year for six years. The project's cost of capital is 12%.

a. What is the project's NPV?
b. There are 3 million outstanding shares. What should be the direct impact of this investment on the per-share value of the common stock?

(Net investment outlay) The cost of a new machine is \$70,000 plus an additional \$8,000 for freight and setup costs. The old machine that is being replaced has a book value of \$15,000 and can be sold for \$7,000. An investment of \$15,000 in working capital is also required. The marginal tax rate is 30%. What is the net investment outlay?

(EAC) The total present value of all costs associated with an asset over a seven-year life is
\$73,285. If the asset has a cost of capital of 11%, what is the EAC of using this asset?

#### Solution Preview

a. NPV = PV of cash flows - initial investment.
The cash flows are \$8 million per year and are in the form of an annuity. We can calculate the PV of annuity by finding the PVIFA factor from the PVIFA table. The time period is 6 years and the rate 12%. From the PVIFA table the PVIFA factor for 6 years and 12 comes to 4.111
The PV of cash flows = 8 X 4.111 = ...

#### Solution Summary

The solution explains some problems relating to capital budgeting

\$2.19