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A capital project and budgeting decision is being considered that would involve an expansion, along with a replacement of some old equipment. The project is
A capital project and budgeting decision is being considered that would involve an expansion, along with a replacement of some old equipment. The project is expected to have a year life for the firm.
The new project will require new equipment costing $k $ million which will be depreciated straightline to a book value of $k at the end of years.
Due to new energy efficient technology, replacing the old equipment with the new more efficient equipment will generate an immediate tax credit of of the equipments cost Although tax laws may vary, for simplicity assume this tax credit does not reduce the $k cost of the new equipment for the straightline depreciation calculation.
This project will replace some existing equipment which currently has a book value BV of $k and an estimated market salvage value of $k Assume that this old equipment is sold in a separate transaction at time zero and that this sale also does not reduce the $k cost of the new equipment for the straightline depreciation calculation.
The expansion will require an additional investment in NWC of $k at time zero, which will be recovered at the end of the year life.
Sales are expected to increase by $k the first year and grow by in years and then by annually during the remaining year life.
Cost of goods sold is forecasted to be of the increased sales, and other selling and general administrative expenses are forecasted to be of the increased sales.
It is forecasted that the new equipment will have a salvage value of $k at the end of the projects year life and the $k book value from the straightline depreciation
The firms weighted average cost of capital WACC for projects of this risk level is The firms marginal tax rate is T
Use the Excel template to complete the cash flow model and the capital budgeting analysis.
Your Excel analysis should clearly indicate the cash flow model analysis timeline and should provide the projects:
NPV
IRR,
PBP
PI
Scenario Analysis completion of the scenario analysis grids which provide NPV of the entire cash flow model under the different scenarios indicated in the grids, and
the projects NPV Profile graph with proper labels
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