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Finance 515 Week 7 New Asset

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FIN515: Week 7 Project – Capital Budgeting Analysis

Your calculations for the amount of property, plant, and equipment (PPE) and the annual

depreciation for the project

Net property plant and equipment as at 28

January 2017 is $24,658,000,000. Additional

investment is 10%*$24,658,000,000 to give $2,465,800,000.

Annual depreciation = (cost of the PPE-Salvage value)/ estimated life

Cost of the PPE= $2,465,800,000

Salvage value= 5%*$2,465,800,000=$123,290,000

Useful life= 12 years

Therefore, annual depreciation= {$2,465,800,000-$123,290,000}/12 years

Annual depreciation= $195,209,166.67

Your calculations that convert the project’s EBIT to free cash flow for the 12 years of the

project.

The following capital budgeting results for the project

The annual Earnings before Interest and Taxes (EBIT) for this new project will be 18% of the

project’s cost. Therefore, EBIT=18%*$24,658,000,000=$4,438,440,000

Assuming there is no interest, then tax is 0.35*$4,438,440,000=1,553,454,000

Earnings after tax= $4,438,440,000-$1,553,454,000=$2,884,986,000

We need to adjust for the project’s free cash flow by adding back the depreciation amount which

is non-cash flow.

Free cash flow= $2,884,986,000 + $195,209,166.67=$3,080,195,166.67

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FIN515: Week 7 Project – Capital Budgeting Analysis

Net present value-The net present value of the project is $24,182,297,475.55 and since it is

positive we should accept the project as it adds value by $24,182,297,475.55 to the net worth of

the company (figure 1).

Discounted payback period- it would take the company 2,465,800,000.00/2,920,297,213.07

years to recover its initial investment= 0.8444 years or 10.1 months. The decision criteria is to

accept the project if takes a shorter time to recover the initial investment. Therefore, we should

take the project since we have approximately 11 years and 2 months to enjoy profits.

Project.

Internal rate of return (figure 2)

An internal rate of return is a discount rate that makes the net present value (NPV) of all cash

flows from a particular project equal to zero.

The formula

IRR= Lower rate + (Higher rate-Lower rate)*Present Value of lower rate/ (Present Value of

lower rate-Present Value of higher rate)

IRR= 100% + (125%-100%)*$613,673,265.99/ ($613,673,265.99+$1,782,921.58)

IRR=100%+ 25 %*( 613,673,265.99/615,456,187.57)

IRR=100%+25%*0.9971

IRR=100%+24.93%

IRR=124.93%, Accept the project since IRR is greater than the required rate of return.

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FIN515: Week 7 Project – Capital Budgeting Analysis Your calculations for the amount of property, plant, and equipment (PPE) and the annual depreciation for the project Net property plant and equipment as at 28th January 2017 is $24,658,000,000. Additional investment is 10%*$24,658,000,000 to give $2,465,800,000. Annual depreciation = (cost of the PPE-Salvage value)/ estimated life Cost of the PPE= $2,465,800,000 Salvage value= 5%*$2,465,800,000=$123,290,000 Useful life= 12 years Therefore, annual depreciation= {$2,465,800,000-$123,290,000}/12 years Annual depreciation= $195,209,166.67 Your calculations that convert the project’s EBIT to free cash flow for the 12 years of the project. The following capital budgeting results for the project The annual Earnings before Interest and Taxes (EBIT) for this new project will be 18% of the project’s cost. Therefore, EBIT=18%*$24,658,000,000=$4,438,440,000 Assuming there is no interest, then tax is 0.35*$4,438,440,000=1,553,454,000 Earnings after tax= $4,438,440,000-$1,553,454,000=$2,884,986,000 We need to adjust for the project’s free cash flow by adding back the depreciation amount which is non-cash flow. Free cash flow= $2,884,986,000 + $195,209,166.67=$3,080,195,166.67 1 FIN515: Week 7 Project – Capital Budgeting Analysis Net present value-The net present value of the project is $24,182,297,475.55 and since it is positive we should accept the project as it adds value by $24,182,297,475.55 to the net worth of the compa ...
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