Capital Budgeting and Budget Analysis
Not what you're looking for?
Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is produced on an automated production line. Due to the forecast of economic growth, the BFBS is considering purchasing a new machine costing $40,000. The machine will have 10 years of useful life and a salvage value of $6,000. Using the straight-line depreciation method, the original machine cost will be depreciated over 10 years not considering the salvage value in the calculation of the depreciation. The new machine will generate $15,000 in annual net cash flows throughout its useful life (ordinary annuity). To maintain the machine it will require additional working capital of $3,000, which would be released at the end of the useful life. The company's tax rate is 40% and its discount rate is 10%. Present value tables can be accessed at the following link: http://highered.mcgraw-hill.com/sites/0072994029/student_view0/present_and_future_value_tables.html
The following items will be assessed in particular:
1. Using the table BFBS Cost Analysis format, analyze the data and discuss the decision that should be made concerning the investment in the new machine..
As an example, review the spreadsheet below:
Cash Tax Effect After-Tax 11% PV of
Description Year(s) Flow 30% Cash flows Factor Cash Flow
New machine cost Now ($500,000) -500,000 1 ($500,000)
Controls and software Now -80,000 -80,000 1 -80,000
Salvage of old machine Now 12,000 0.7 8,400 1 8,400
New annual cost savings 1 to 12 78,500 0.7 54,950 6.4924 356,755
Depreciation tax shield 1 to 12 -45,000 0.3 -13,500 6.4924 -87647.4
Salvage value of machine 12 20,000 0.7 14,000 0.2858 4,002
Net present value ($298,490.40)
Purchase this Solution
Solution Summary
Computations and discussion attached. I put the rules for finding the factors in memos for the cells (put mouse over cell and it will pop up).
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Writing Business Plans
This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.