Worksheet Assignment # 5

docx

School

Washington State University *

*We aren’t endorsed by this school

Course

381

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by ConstableJellyfish18213

WORKSHEET ASSIGNMENT # 5 Depreciation & Capital Budgeting (9 points) Due by Monday, November 13 th , 11:59 pm (PT) Instructions Answer the questions in this worksheet as you attend the lectures. The questions on this worksheet are usually the same questions the class is answering during the lecture, so you will have the opportunity to work along with the lecture during class time. Upload the worksheet on Canvas when you have completed the questions. You will get a full answer sheet to check your working as soon as you upload your worksheet. You can keep this worksheet for yourself and use it to study for the exam or when completing the homework assignments. Grading You will receive full grades so long as you make a genuine attempt to answer the questions. A genuine attempt means that you must demonstrate that you have attended the lectures related to this particular worksheet. Given that the same questions are being answered during the lectures, your responses should reflect what is covered and provided in the lectures. Whenever calculations are required, you must show your working. Points will be deducted if you only give the final answer without showing your working regardless of giving the correct answer. So long as you make a genuine attempt (as explained above), points will not be automatically deducted when some of your responses are incorrect. Think of this as a chance to practice your new knowledge... and have fun! After you submit your worksheet, you will receive the correct answers in an announcement on Canvas. Make sure to compare your responses with the answer sheet to check your understanding of the material. Questions - DEPRECIATION 1. WSU’s athletic department purchased a new van for $30,000. They expect to sell it in 3 years for $4,000. What is the annual depreciation expense and annual tax saving if the marginal tax rate is 10%, when using: a. Straight-line depreciation Year Depreciation Expense Cost Remaining Tax Saving 1 ($30,000- $4,000)/3 $30,000-$8,667 =$21,333 $8,667*10%= $866.70 SPMGT 374 1

=$8,667 2 ($30,000-$4,000) /3 = $8,667 $21,333 - $8,667 = $12,666 $8,667*10%= $866.70 3 ($30,000-$4,000) /3 = $8,667 $12,666 - $8,667 = $3,999 $8,667*10%= $866.70 b. Double declining balance depreciation Year SL% DDB% Depreciatio n Expense Cost Remaining Tax Saving 1 100%/3 = 33.3% 0.33 * 2 = 67% 67% *$26,000 = $17,333.33 $30,000 – $17,333.33 = $12,666.67 $17,333 * 10% = $1,733.30 2 100%/3 = 33.3% 0.33 * 2 = 67% 67% (26,000 – 17,333.33) = $ 5,806.67 $12,666.67 - $5,806.67 = $6,860 $5,807 * 10% = $580.70 3 100%/3 = 33.3% 0.33 * 2 = 67% 67% ($ 26,000 – (17,333.33 + 5,806.67)) = $1,916.20 $6,860 - $1,916.20 = $4,943.80 $580.70 * 10% = $191.60 Questions – CAPITAL BUDGETING 1. Your gym is evaluating a project to install televisions in the workout area. The gym will install 6 televisions that have a sticker price of $200 each. Delivery for 6 televisions is $50. An electrician is required to install them for around $350. What is the initial cost of the project? $200 (6) + $50 +$350= $1600 SPMGT 374 2

2. This year, revenues from gym memberships were $20,000. Memberships have been growing 6% per year, which is expected to continue into the future. However, the new televisions are expected to increase membership growth to 8% per year. Moreover, advertising time will be sold on the televisions for a total $10,000 a year. The televisions can be depreciated using straight-line depreciation for 5 years with no resale value. Use a 21% tax rate. What is the incremental cash flow for the first year of the project? ICF= estimated net earnings with a television $20,000*8%= ($1600+$20,000+$10,000) = $31,600 Estimated net earning without a television $20,000*6%= ($1200+$20,000+$21,200) = $21,200 $31,600-$21,200= $10,400 Depreciation expenses $1,200/5=$240 Tax Benefits $240*21%=$50.40 ICF $10,400+50.40=$10,450.40 3. Project B has an initial cost of $1,000. Incremental cash flows are estimated to be $200 in Year 1 and $300, $400, $500 in subsequent years. Your firm’s maximum acceptable payback period is 3 years. As the finance manager in charge of this project, should you accept it into your department’s capital budget? SPMGT 374 3

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Year Incremental cash flow Cumulative cash flow 0 ($1,000) ($1,000) 1 $200 (-$1,000) + $200 = (-$800) 2 $300 (-$800) + $300 = (-$500) 3 $400 (-$500) + $400 = (-$100) 4 $500 (-$100) + $500 = $400 When are the project’s costs recovered? (Be precise, do not just give an approximation) (-$100/$500) = 0.2 0.2+3= 3.2 years Should you accept the project? Why or why not? No. You should not accept the project because it exceeds the maximum payback period of 3 years Which project is better, project A or project B? Why? Project A because it is the fastest project to pay back 2.3 compared to 3.2 years. 4. Project D has an initial cost of $1,000. Incremental cash flows are estimated to be $200 in Year 1 and $300, $400, $500 in subsequent years. In Year 0, the initial cost of $1,000 is not discounted, as the value of $1,000 today is $1,000. For Year 1, we apply the discount rate of 10% to the $ 200 cash flow for that year. The discount rate is also applied to the cash flows for years 2 through 4. Your firm’s maximum acceptable payback period is 3 years. As the finance manager in charge of this project, should you accept it into your department’s capital budget? SPMGT 374 4

Yea r Increment al Cash flow PVIF Discounted Cash Flow Cumulative cash Flow 0 ($1,000) ($1000) 1 $200 . 909 200*.909= $181.8 ($1000)+ 181.8= $818.20 2 $300 . 826 300*.826= $247.8 ($818.20) + $247.8= 3 $400 . 751 400*.751= $300.4 (-$570.40) + $300.40 = (- $270 4 $500 . 683 500*.683=$341.5 (-$270) + $341.50 = $71.50 When are the project’s costs recovered? (Be precise, do not just give an approximation) (-$270)/ 341.50 = 0.79 + 3= 3.79 Should you accept the project? Why or why not? Reject because it is over the 3 years Which project is better, project C or project D? Why? Project C was better because it had a shorter payback period and a maximum payback period Why is project C taking longer to pay itself off than project A? The discounted cash flows makes it a lot longer for project C to be paid back then Project A. *For projects with the same incremental cash flow and initial cost, it will always take longer to pay the project fully using the discounted payback period compared to the payback period.* 5. What is the project’s net present value? Explain the two ways (without using the excel function of NPV), we learned in class, to find the net present value. It generated $71.5 To get the NPV: The last column of cumulative cash flow Add all the discounted cash flow and then subtract it from the initial cost SPMGT 374 5

Should you accept the project? Why or why not? Yes, because it is above 0. Which project is better, project C or project D? Why? Project C because it is higher cumulative cash flow than project D. 6. Which method would be preferable to use if our organization has liquidity concerns and established a maximum payback period? Explain. Discounted payback period because you are considering the time value of money and if you are tough on cash you are going to care about the discounted payback period. 7. Which method would be preferable to use if liquidity is not an issue and no maximum payback period is provided? Explain. The net present value because if you are a large company who can take on debt you are trying to make as much money possible for your company and the discounted payback period doesn’t tell you that but the net present value does. If it is a very long term project you might make mistakes in your projections in cash flows and the same discount rate. APPLICATION OF A CAPITAL BUDGETING PROBLEM: A Golf Course Case Study You are the financial manager of a recently built, 18-hole, golf course evaluating the possibility of an investment in golf carts. You need to apply the steps of capital budgeting to make this decision. The course was originally designed for people to walk around. Green fees were $25, the course averaged 20 rounds a day, and it was open for 300 days during a year. You anticipate the same performance in the coming years. However, the owner has asked you to evaluate the capital expenditure of 10 golf carts. The golf carts cost $8,000 each and have a useful life of 10 years, after which they can be sold for $1,000 each (straight line depreciation will apply). To make the course golf cart friendly, you will need to pave parts of the course ($40,000) and build storage and a charging facility ($20,000). You will not sell anything after gaining the carts. You anticipate increasing the number of rounds played to 24 a day with the carts. You also expect to rent out 20 carts a day at $5. However, these SPMGT 374 6

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

revenues will be offset by electricity and maintenance costs, which are $5,000 and $20,000 per year respectively. To purchase the carts, you plan to take out a loan at 9% interest. Your tax rate is 21%. 1. Should the golf course invest in the golf carts? Show your working using Excel. Copy and paste the Excel table below to demonstrate your calculations. The NPV in this investment is supposed to exceed $94,000 and have an IRR of almost 23%. Based on the calculations, the golf course should invest in the golf carts. 2. The owner has come to you explaining that she needs the project to turn a profit in three years so she can manage the debt obligations of the business. Should she still invest in the golf carts? Show your working using Excel and explain. Copy and paste the Excel table below to demonstrate your calculations. The net profit needs to net a positive profit in three years so it is advised for her not to invest because they will not make a profit for almost 4 years. The discounted payback period, the carts will not generate a net positive cash flow until almost five years. Payback: $30,590 / $36,470 = 0.84 0.84 + 3 = 3.84 years Discounted payback: $21,847.42 / $23,704 = 0.92 0.92 + 4 = 4.92 years APPLICATION OF A CAPITAL BUDGETING PROBLEM: A Golf Course Case Study You are the financial manager of a recently built, 18-hole, golf course evaluating the possibility of an investment in golf carts. You need to apply the steps of capital budgeting to make this decision. The course was originally designed for people to walk around. Green fees were $25, the course averaged 20 rounds a day, and it was open for 300 days during a year. You anticipate the same performance in the coming years. However, the owner has asked you to evaluate the capital expenditure of 10 golf carts. The golf carts cost $8,000 each and have a useful life of 10 years, after which they can be sold for $1,000 each (straight line depreciation will SPMGT 374 7

apply). To make the course golf cart friendly, you will need to pave parts of the course ($40,000) and build storage and a charging facility ($20,000). You will not sell anything after gaining the carts. You anticipate increasing the number of rounds played to 24 a day with the carts. You also expect to rent out 20 carts a day at $5. However, these revenues will be offset by electricity and maintenance costs, which are $5,000 and $20,000 per year respectively. To purchase the carts, you plan to take out a loan at 9% interest. Your tax rate is 21%. SPMGT 374 8