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Capital Budgeting Problem Kraemer Company is launching a new product. The following information relates to the launch: 1) 4 year project life 8) Sales for
| Capital Budgeting Problem | ||||||||
| Kraemer Company is launching a new product. The following information relates to the launch: | ||||||||
| 1) 4 year project life | 8) Sales for first year | $200,000 | ||||||
| 2) New equipment cost | $(200,000) | 9) Sales increase per year | 5% | |||||
| 3) Equipment ship & install cost | $(35,000) | 10) Operating cost: | $(120,000) | |||||
| 4) Related start up cost | $(5,000) | as a percent of sales | -60% | |||||
| 5) Inventory increase | $25,000 | 11) Depreciation expense - SL | $(60,000) | |||||
| 6) Accounts Payable increase | $5,000 | 12) Tax rate | -40% | |||||
| 7) Equip. salvage value after tax | $15,000 | 13) WACC | -10% | |||||
| Calculate NPV, IRR and Pay-back?? | ||||||||
| Cash Flow Framework: | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | |||
| Investments: | ||||||||
| Total | ||||||||
| Operations: | ||||||||
| Total | ||||||||
| Terminal: | ||||||||
| 1) Change in WC OR Realease of WC | ||||||||
| 2) Salvage Value(after tax) | ||||||||
| Total Terminal Cash flows | ||||||||
| Total Cash Flows | $ - | $ - | $ - | $ - | $ - | |||
| NPV = ?
Q: How would you explain to your CEO(in business terms) what NPV means? Q: What are the advantages of using NPV versus IRR? | IRR = ? | Payback = ?
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