More Capital Project
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SAG Corp. - CAPITAL PROJECT ANALYSIS - COST SAVINGS
$ in millions
Cost of machine
$ 7,500,000.00 Initial Working Capital Investment
$ 45,000.00 Sale/Residual value end of year 10
10%
Expected COGS Savings
20%
Annual incremental working capital
$45,000 Tax Rate
26%
Required Rate of Return
11%
Tax depreciation 5 year MACRS based on cost of the machine
Year 1
20%
Year 2
32%
Year 3
19%
Year 4
12%
Year 5
12%
Year 6
5%
PERIOD
0
1
2
3
4
5
6
7
8
9
10
Production costs
$ 7,000,000 $ 7,140,000 $ 7,282,800 $ 7,428,456 $ 7,577,025 $ 7,728,566 $ 7,883,137 $ 8,040,800 $ 8,201,616 $ 8,365,648 Cost savings
$ 1,400,000 $ 1,428,000 $ 1,456,560 $ 1,485,691 $ 1,515,405 $ 1,545,713 $ 1,576,627 $ 1,608,160 $ 1,640,323 $ 1,673,130 Less Depreciation
1,500,000 2,400,000 1,425,000 900,000 900,000 375,000 Add Residual Value
750,000 Taxable Income
(100,000) (972,000) 31,560 585,691 615,405 1,170,713 1,576,627 1,608,160 1,640,323 2,423,130 Less Taxes
(26,000) (252,720) 8,206 152,280 160,005 304,385 409,923 418,122 426,484 630,014 After Tax Income
(74,000) (719,280) 23,354 433,411 455,400 866,328 1,166,704 1,190,038 1,213,839 1,793,116 Add: Depreciation
1,500,000 2,400,000 1,425,000 900,000 900,000 375,000 - - - - Less: Annual Working Capital Investment
45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 (45,000)
After-Tax Cash Flow
$ (7,545,000) $ 1,381,000 $ 1,635,720 $ 1,403,354 $ 1,288,411 $ 1,310,400 $ 1,196,328 $ 1,121,704 $ 1,145,038 $ 1,168,839 $ 1,838,116 Cumulative Cash Flow
$ 1,381,000 $ 3,016,720 $ 4,420,074 $ 5,708,486 $ 7,018,886 $ 8,215,213 $ 9,336,918 $ 10,481,956 $ 11,650,795 $ 13,488,911 (7,545,000)
Payback----->
OCF in year 6 not needed
$ 670,213 NPV
$ 460,257 Percentage not needed
56.0%
IRR
12.5%
Percentage needed
44.0%
PAYBACK PERIOD
5.4
plus first 5 years
Profitability Index
1.06 SAG Corp. is a manufacturer of cleaning products with locations in the United States. Its manufacturing plant in Greenville, SC is considering the purchase of a new filling machine. The cost of the machine is $7,500,000 and will require an initial working capital investment of $45,000. It is expected to result in cost savings of 20.0% of that location's production costs over the life of the filling machine which is 10 years. Over the 10 years an annual investment in working capital will be required of $45,000 at the start of each year and will be realized as a cash inflow in the final year when the project's life is completed and the accounts receivable and inventory are liquidated. At the end of its life it can be sold as scrap for 10% of the original cost. Five year MACRS depreciation will be used for tax purposes and the company's average tax rate is 24% and the marginal rate is 26%. Given the risk level of this project, SAG Corp. requires a rate of return 1% below its weight cost of capital. The weighted cost of capital is 12%.
Prepare an analysis to determine if this project will generate an attractive level of economic benefits. Specifically determine the net present value, internal rate of return, payback period and profitability index of the project.
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Related Questions
Initial Equipment $65,000 Project Life 3 Years Sales $55,000 Variable Costs $25,000 Fixed Costs $
10,000 Tax rate 26% Cost of Capital 10% Ending Book Value $10,000 Sales Price at Year 3 $5,000 Net
Working Capital $10,000 CALCULATE THE INITIAL COSTS, CALCULATE THE OPERATING CASH FLOW,
CALCULATE THE TERMINAL NON OPERATING CASH FLOW, CALCULATE THE NPV. please show your
work and formulus for the answers
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Compute the NPV based on the following data
Life of project
10.00
year
Required Investment
500,000.00
Required Rate of Return
8%
Required Working Capital to be released at the end of the project
35,000.00
Salvage value of equipment at end of year 10
12,000.00
Required overhaul in year 5
60,000.00
Annual increase in net income for this project
85,000.00
Year
Cash flow
0
1
2
3
4
5
6
7
8
9
10
Net Present Value
IRR
Should we accept this project:?
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need help this questions cost accounting
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2. Calculating Project NPV The Fleming Company is considering a new investment. Financial projections for the
investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all
operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working
capital is recovered at the end of the project.
Investment
Sales revenue
Operating costs
Depreciation
Net working capital spending
Year 0
$32,800
450
Year 1 Year 2 Year 3 Year 4
$14,200
2,100
8,200
175
$15,900
$15,700
2,100 2,100
8,200
8,200
250
275
$12,900
2,100
8,200
?
a. Compute the incremental net income of the investment for each year.
b. Compute the incremental cash flows of the investment for each year.
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
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Input area:
Initial investment
Pretax salvage value
Cost savings per year
Cost savings per year
$
Working capital reduction
Annual depreciation charge
Aftertax salvage value
69 69 69 SA SA SA SA
$
535,000
$
30,000
$
150,000
100,000
$
60,000
$
107,000
$
22,800
Tax rate
Required return
*Depreciation straight-line
over life
24%
11%
5
Output area:
NPV
150,000
cost savings
$
100,000
Year
Cash flow
Year
0 $
(475,000)
0 $
1
139,680
1
2
139,680
234L
139,680
139,680
5
102,480
Accept/Reject
Required pretax cost savings:
NPV w/o OCF
Required OCF
OCF less dep. tax shield
Cost savings
$
69 69 69
$
(497,076.39)
$
134,494.11
108,814.11
2345
cost savings
Cash flow
(475,000)
101,680
101,680
101,680
101,680
64,480
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You are evaluating projects 1 and 2. The projects have the following yearly operating profit. Depreciation expense is $2,000 per year for each project. Assume a 10% required rate of return.
Project 1 Project 2
Year 1 $ 3,370 $ 8,000
Year 2 $ 3,500 $ 8,000
Year 3 $ 4,100 $ 8,000
Year 4 $ 4,270 $ 8,000
Year 5 $ 4,620 $ 8,000
Investment $ 18,000 $ 33,200
Required:
Using Net Present Value analysis, please answer the following questions:
Assuming you had $100,000 to invest, which investment would you make, if any, and why?
Assuming you had $35,000 to invest, which investment would you make, if any, and why?
PV factors…
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You are evaluating projects 1 and 2. The projects have the following yearly operating profit. Depreciation expense is $2,000 per year for each project. Assume a 10% required rate of return.
Project 1 Project 2
Year 1 $ 3,370 $ 8,000
Year 2 $ 3,500 $ 8,000
Year 3 $ 4,100 $ 8,000
Year 4 $ 4,270 $ 8,000
Year 5 $ 4,620 $ 8,000
Investment $ 18,000 $ 33,200
Required:
Using Average Rate of Return, which project, if any, would you evaluate further and why?
Using Net Present Value analysis, please answer the following questions:
Assuming you had $100,000 to invest, which investment would you make, if any, and why?
Assuming…
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2 Laurman, Inc. is considering the following project:
4 Required investment in equipment
5 Project life
6
Salvage value
7
8 The project would provide net operating income each year as follows:
9 Sales
10 Variable expenses
11
Contribution margin
12
Fised expenses:
13
Salaries, rent and other fixed out-of pocket costs
14
Depreciation
15
Total fixed expenses
16 Net operating income.
17
18 Company discount rate
$2,205,000
7
225,000
$2,750,000
1,600,000
$1,150,000
$520,000
350,000
870,000
$280.000
18%
D
N
19
20 Required:
21
22
23
(Use cells A4 to C18 from the given information, as well as 824, and A30 to D45 to complete this question. Negative amounts or amounts to be deducted should be input as negative values
and will display in parentheses.)
24 1. Compute the annual net cash inflow from the project.
$630,000
25
26 2. Complete the table to compute the net present value of the investment.
27
28
Year(s)
29
Now
152,205,000.00)
1 through 7
30 Initial investment
31 Annual cost savings
32…
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i will 10 upvotes
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Required information
A company that manufactures magnetic flow meters expects to undertake a project that will have the cash flows
estimated.
First cost, $
Equipment replacement cost in
year 2, $
Annual operating cost, $/year
Salvage value, $
Life, years
-880,000
-300,000
-930,000
250,000
14
At an interest rate of 10% per year, what is the equivalent annual cost of the project? Find the AW value using tabulated factors
The equivalent annual cost of the project is $- 980,731.95
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Initial investment
Pretax salvage value
Cost savings per year
535,000
30,000
150,000
Cost savings per year
100,000
Working capital reduction
$
60,000
Annual depreciation charge
$
Aftertax salvage value
6969
107,000
22,800
Tax rate
Required return
*Depreciation straight-line
over life
24%
11%
5
Output area:
$
NPV
150,000
cost savings
$
100,000
Year
Cash flow
Year
0 $
(475,000)
0 $
1
139,680
1
2
139,680
3
139,680
4
139,680
5
102,480
2345
Accept/Reject
Required pretax cost savings:
NPV w/o OCF
Required OCF
OCF less dep. tax shield
Cost savings
69 69 69
$
(497,076.39)
$
134,494.11
$
108,814.11
cost savings
Cash flow
(475,000)
101,680
101,680
101,680
101,680
64,480
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Related Questions
- Initial Equipment $65,000 Project Life 3 Years Sales $55,000 Variable Costs $25,000 Fixed Costs $ 10,000 Tax rate 26% Cost of Capital 10% Ending Book Value $10,000 Sales Price at Year 3 $5,000 Net Working Capital $10,000 CALCULATE THE INITIAL COSTS, CALCULATE THE OPERATING CASH FLOW, CALCULATE THE TERMINAL NON OPERATING CASH FLOW, CALCULATE THE NPV. please show your work and formulus for the answersarrow_forwardCompute the NPV based on the following data Life of project 10.00 year Required Investment 500,000.00 Required Rate of Return 8% Required Working Capital to be released at the end of the project 35,000.00 Salvage value of equipment at end of year 10 12,000.00 Required overhaul in year 5 60,000.00 Annual increase in net income for this project 85,000.00 Year Cash flow 0 1 2 3 4 5 6 7 8 9 10 Net Present Value IRR Should we accept this project:?arrow_forwardneed help this questions cost accountingarrow_forward
- 2. Calculating Project NPV The Fleming Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Investment Sales revenue Operating costs Depreciation Net working capital spending Year 0 $32,800 450 Year 1 Year 2 Year 3 Year 4 $14,200 2,100 8,200 175 $15,900 $15,700 2,100 2,100 8,200 8,200 250 275 $12,900 2,100 8,200 ? a. Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?arrow_forwardInput area: Initial investment Pretax salvage value Cost savings per year Cost savings per year $ Working capital reduction Annual depreciation charge Aftertax salvage value 69 69 69 SA SA SA SA $ 535,000 $ 30,000 $ 150,000 100,000 $ 60,000 $ 107,000 $ 22,800 Tax rate Required return *Depreciation straight-line over life 24% 11% 5 Output area: NPV 150,000 cost savings $ 100,000 Year Cash flow Year 0 $ (475,000) 0 $ 1 139,680 1 2 139,680 234L 139,680 139,680 5 102,480 Accept/Reject Required pretax cost savings: NPV w/o OCF Required OCF OCF less dep. tax shield Cost savings $ 69 69 69 $ (497,076.39) $ 134,494.11 108,814.11 2345 cost savings Cash flow (475,000) 101,680 101,680 101,680 101,680 64,480arrow_forwardYou are evaluating projects 1 and 2. The projects have the following yearly operating profit. Depreciation expense is $2,000 per year for each project. Assume a 10% required rate of return. Project 1 Project 2 Year 1 $ 3,370 $ 8,000 Year 2 $ 3,500 $ 8,000 Year 3 $ 4,100 $ 8,000 Year 4 $ 4,270 $ 8,000 Year 5 $ 4,620 $ 8,000 Investment $ 18,000 $ 33,200 Required: Using Net Present Value analysis, please answer the following questions: Assuming you had $100,000 to invest, which investment would you make, if any, and why? Assuming you had $35,000 to invest, which investment would you make, if any, and why? PV factors…arrow_forward
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