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Some Capital Budgeting

As Scoutmaster of your local scout troop, you have finally decided to give in to the numerous requests from your scouts to purchase a new smoke sifter for the troop. Scouts have told you the new smoke sifter will prove invaluable to the troop, allowing them to recruit new members and raise the troop's annual revenues by $1000 per year.

Your troop is a taxable, for-profit entity. Your tax rate is 36%. You plan to depreciate the new smoke sifter on a straight line basis to a zero salvage value at the end of five years. The cost of the new equipment is $1999. A spare parts inventory investment of $200 will have to be made at the time of purchase. You don't think this inventory will have any salvage value at the end of five years.

Use Excel to answer the questions below. Clearly label all inputs and highlight your answers using the yellow highlighter on the top menu bar.

1. Prepare a table of annual cash flows for the new investment. Show your calculations in some detail, as done in Table 7.5 of your text. (This problem's calculations are less involved than those in Table 7.5.)

2. Calculate the payback period of this investment.

3. Calculate the IRR of this investment.

4. Calculate the NPV of this investment, using discount rates of 10% and 20% per year.

5. Comment on the desirability of this investment, given the results above.

Solution Summary

The solution explains how to calculate the cash flows of the project and determine the payback period, IRR and NPV of the project.