Capital BudGet Inflation Adjustment Problem
Autor: dq dcw • May 16, 2019 • Study Guide • 765 Words (4 Pages) • 515 Views
Free cash flow
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[pic 2] | FCFF=EBIT (1-Tc) — capital expenditures + depreciation — Δ in working capital FCFF= EBT — actual tax paid + after-tax interest expense — capital expenditures + depreciation — Δ in working capital If the WACC = 10% and Re=15% a) what is the PV of the firm. Assume no growth rate and a going firm |
Capital rationing
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INFLATION ADJUSTMENT PROBLEM
nominal discount rate is 8% expected inflation rate is 2%. Determine the PV of a 6 payment annuity of $1000 (real cash flow) per yr. ist pmt of the annuity is in one yr.
(1+Rr) = (1+Rn)/(1+ inflation rate)
Capital Budgeting problem
Western States Inc. (WSI), a home outfitters company with profitable ongoing operations, is considering adding a new product to its line. The new product is a lightweight, super-strength gazebo, which will be marketed in areas around the world that experience hot summers and cold winters. A major competitive advantage of the gazebo over competitors’ models is that it will not collapse under the weight of winter snow accumulation, thus saving homeowners the trouble of having to dismantle their gazebos each fall and reassemble them each spring.
WSI has completed extensive research and development testing on the new gazebo at a cost of $150,000 and is now considering whether or not to proceed with production. If the company goes ahead with the project, it will require an investment of $600,000 in new machinery. The machinery can be placed for tax purposes in an asset pool with a CCA rate of 30%. It is anticipated that after five years the project will end and the equipment will be sold to a competitor for $75,000. The company has many such pieces of equipment in the asset pool, which always has a large UCC balance.
It is expected that the project will generate incremental revenues of $300,000 per year for each of the five years of the project, and incremental expenses of $50,000 per year for each of the 5 years of the project. In addition to these expenses WSI will have to pay an additional $10000 every year for each of the nest five years as interest charges on financing.
The company also anticipates that it will have to maintain working capital requirements above its regular levels as follows:
Year 0: $50,000; Year 1: $80,000; Year 2: $80,000; Year 3: $90,000; Year 4: $100,000; Year 5: $100,000. The incremental working capital amounts will revert back to pre-project levels by the end of Year 6.
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