Capital Budgeting-Asset Replacement Assignment - 825 Words

Capital Budgeting-Asset Replacement Assignment (Math Problem Sample) Content: Capital Budgeting-Asset Replacement AssignmentName:Course:Instructor:Institution:Date of SubmissionCapital Budgeting- Asset Replacement AssignmentIncremental Initial Capital OutlayDescriptionCash price for new asset acquisitionInstallation costsIncremental net working capital (see working 1)TOTAL Amount $35, 500,000750,00034,864,00071,114,000 Incremental Savings/BenefitsDescriptionYear 1. 480x 74,000units- 310x 80,000 unitsYear 2. 480x 95,000 units- 310 x 60,000 unitsYear 3.480x 125,000 unitsYear 4.480x 105,000 unitsYear 5. 480x 80,000 unitsTOTALLess Decremented benefitsYear 1. 80,000 units x 35Year 2. 60,000 units x 35Year 1 2. 15,000 units x 310 x214,200,00TOTAL INCREAMENTAL BENEFITS Amount $10, 720,00029,000,00060,000,00050,400,00038,400,000188,520,000(14, 200,000)174, 320, 000 Incremental Operating CostsDescriptionYear 1. 185x 74,000 units - 125x 80,000 unitsYear 2. 185x 95,000 units- 125x 60,000 unitsYear 3. 185x125,000 unitsYear 4. 185x105,000 unitsYear 5. 185x 80,000 unitsTOTAL Amount $3, 690,00010,075,00023,125,00019,425,00014,800,00074, 950,000 Incremental Earnings Before Interest and Tax (EBIT) = Incremental Benefits à ¢Ã¢â€š ¬ Incremental Operating Costs. Therefore$174, 320, 000- $74, 950,000= $ 99, 370, 000Less incremental depreciation per annum (see working 2) $ (7,620,000)$91, 750,000Less Corporate Tax 35% of 91,750,000 (32,112,500)$ 59,637,500Add back incremental depreciation $ 7,620,000Incremental Operating Cash flow $ 67,257,500Incremental Salvage value $ 5, 400, 000Incremental networking capital realized $34,864,000Total Salvage cash $40,264,000TreatmentsNet Present ValueTotal Salvage Cash flow + Operational Cash flow PVIFA (12%, 5 years)$40,264,000+$ 67,257,500 x 3.605$40,264,000+$242,463,287.5= $282,727,287.5Decision Rule: Since the net present value of the project is positive, the firm should consider purchasing the asset to replace the current one (Baker, 2011; Ross, Weterfield, and Jordan, 2012).Internal Rate of ReturnIRR= L + (A-O) (H-L) * -B)Where L= lower rate, H= higher rate; A= positive PV, B=negative PV.10 + (282,727,287.5- 0) (17-10)(282,727,287.5- - 100,000,000)10 + 5.2= 15.2%Decision Rule: As the internal rate of return is greater than zero, the company should consider the purchase of the new technology as quite feasible (Baker, 2011).Payback PeriodPayback period = Initial InvestmentCash inflow per period71,114,000 = 1. 06 = 1 year and 22 days.67,257,500Decision Rule: the management normally determines payback period in a single project. If the management considers that the payback period becomes less than 1 year and 22 days, the project will be feasible (Baker, 2011; Ros s, Weterfield, and...