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    Capital Budgeting: Present Value

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    Caledonia Products

    Your boss would like you to look at a new project. This project involves the purchase of a new plasma cutting tool that can be used in its metal works division. The products manufactured using the new technology are expected to sell for an average price of $300 per unit, and the company analyst expects the firm can sell 20,000 units per year at this price for a period of 5 years. To get into this business will require the purchase of a $2 million piece of equipment that has a residual or salvage value in five years of $200,000. In addition, the firm expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is:

    Given
    Initial cost of equipment $2,000,000
    Project and equipment life 5
    Salvage value of equipment $200,000 Note tax adjust at tax rate
    Working capital requirement $300,000
    Depreciation method Straight-Line
    Depreciation expense $400,000
    Discount rate 12.00%
    Tax rate 30.00%

    Further analysis was performed to define the expected, worst, and best scenarios as:

    Probability 40% 25% 35%
    Base Case Worst Case Best Case
    Assumptions:
    Unit Sales 20,000 15,000 25,000
    Price Per unit $300.00 $250.00 $330.00
    Variable Cost per unit $200.00 $210.00 $180.00
    Cash fixed Costs per year $500,000.00 $450,000.00 $350,000.00
    Depreciation $400,000.00 $400,000.00 $400,000.00

    Solution -- Cash Flow From Operations:
    Revenues
    Less: Variable Cost
    Less: Fixed Expenses
    Gross margin

    Less: Depreciation
    Net Operating Income

    Less: Income tax expense
    Net income

    Add Back Depreciation
    Cash Flow From Operations

    Base Case Working
    Year Initial Outlay Capital Operating Cash Salvage
    0
    1
    2
    3
    4
    5

    Worst Case Working
    Year Initial Outlay Capital Operating Cash Salvage
    0
    1
    2
    3
    4
    5

    Best Case Working
    Year Initial Outlay Capital Operating Cash Salvage
    0
    1
    2
    3
    4
    5

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    https://brainmass.com/business/net-present-value/capital-budgeting-present-value-381098

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    Solution Summary

    This solution provides a complete computation of the given finance problem formatted in Excel.

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