FIN 486 Week 4 Individual Assignment Capital Budgeting
Capital Budgeting
Derwin Brown
FIN/486
12/15/2014 Rosa Welton, Instructor
Capital Budgeting
Considering the information for the Proposal concerning the building of the new factory, the incremental cash flows are needed for the NPV analysis. The incremental cash flows are sales of $3 million a year which equals an increase in gross margin by $150,000 given a 5% gross margin and initial on investment of $10 million which is the cost of building the new factory. The savage value at the end of the project life will be $14 million.
Given a 10% weighted average cost of capital, the following table shows the net present value that is computed for this project.
Year
Cash Flow
PV Factor
Present Value
0
(10,000,000) 1.0000 (10,000,000)
1
150,000 0.9091 136,364
2
150,000 0.8264 123,967
3
150,000 0.7513 112,697
4
150,000 0.6830 102,452
5
150,000 0.6209 93,138
6
150,000 0.5645 84,671
7
150,000 0.5132 76,974
8
150,000 0.4665 69,976
9
150,000 0.4241 63,615
14,150,000 0.3855 5,455,438
Net present value (3,680,709)
As shown in the present value table, the NPV of the capital project is $3,680,709 on the negative side which means the project will result in the decrease in the wealth of the company’s stockholders, resulting in violation of the wealth maximization concept.
The analysis as per the proposal was done for 10years which is the expected economic life of the new factory. At the end of the economic life of the new factory, the cash flow includes the $14 million expected recovery from selling the factory. Time value of money is the concept that an dollar attain today will be valued more than the same dollar attained at a date in the future and can be computed by the following formula 1(1+r)^t.
The PV of each of the
Derwin Brown
FIN/486
12/15/2014 Rosa Welton, Instructor
Capital Budgeting
Considering the information for the Proposal concerning the building of the new factory, the incremental cash flows are needed for the NPV analysis. The incremental cash flows are sales of $3 million a year which equals an increase in gross margin by $150,000 given a 5% gross margin and initial on investment of $10 million which is the cost of building the new factory. The savage value at the end of the project life will be $14 million.
Given a 10% weighted average cost of capital, the following table shows the net present value that is computed for this project.
Year
Cash Flow
PV Factor
Present Value
0
(10,000,000) 1.0000 (10,000,000)
1
150,000 0.9091 136,364
2
150,000 0.8264 123,967
3
150,000 0.7513 112,697
4
150,000 0.6830 102,452
5
150,000 0.6209 93,138
6
150,000 0.5645 84,671
7
150,000 0.5132 76,974
8
150,000 0.4665 69,976
9
150,000 0.4241 63,615
14,150,000 0.3855 5,455,438
Net present value (3,680,709)
As shown in the present value table, the NPV of the capital project is $3,680,709 on the negative side which means the project will result in the decrease in the wealth of the company’s stockholders, resulting in violation of the wealth maximization concept.
The analysis as per the proposal was done for 10years which is the expected economic life of the new factory. At the end of the economic life of the new factory, the cash flow includes the $14 million expected recovery from selling the factory. Time value of money is the concept that an dollar attain today will be valued more than the same dollar attained at a date in the future and can be computed by the following formula 1(1+r)^t.
The PV of each of the