Capital Budgeting:

Use the net present value, internal rate of return and payback methods to evaluate the acceptability of your capital budgeting project. Show all your work on the Project Analysis Worksheet.

The assignment is as follows:

-Identifying all of the relevant cash flows,

-Correctly structuring the worksheet by listing the cash flows by the active years of the project,

-Correctly calculating the projects net present value, internal rate of return, and payback period,

-Making the proper decision to accept or reject the project based on the calculations on your worksheet, and.

-Identifying the management (real) options associated with the project.

Use straight-line depreciation when developing your project.

The cost of capital (the interest rate for discounting future cash flows) is 7% and the effective tax rate is 40%.

		Initial Year
		Year 0
Cost of the capital asset		$ 2,500,000
Installation cost		$ 1,000,000
Advertising cost		$ 350,000
Training cost		$ 100,000
Gain or loss on the sale of capital asset being replaced		$ -
Tax on the gain (or tax credit on the loss) from the sale of the capital asset being replaced		$ -
Other cash outflows (or inflows) in the project's initial year		$ (1,000,000)

		Initial Year	Interim Years of the Capital Budgeting Project					Terminal Year
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year T
Cost of the capital asset
Installation cost
Shipping cost
Training cost
Gain or loss on the sale of capital asset being replaced
Tax on the gain (or tax credit on the loss) from the sale of the capital asset being replaced
Other cash outflows (or inflows) in the project's initial year

incremental sales revenue
less incremental cost of the goods sold
less selling , general and admin. expenses (incremental)he**less other incremental operating expenses
less other incremental operating expenses
less incremental depreciation
EBIT			0	0	0	0	0	0
less tax on operating income (40%)ssplus incremental depreciationta,,less incremental working capital requi			0	0	0	0	0	0
After-tax EBIT			0	0	0	0	0	0
plus incremental depreciationta,,less incremental working capital requirementio%%less incremental capital expe
less incremental working capital requirementio%%less incremental capital expendituress JJplus recap
less incremental capital expendituress JJplus recapture of working capital requirement (for non-perpetual projec
plus recapture of working capital requirement (for non-perpetual projects)
plus gain (or loss) on the sale of the capital assetctSSplus tax on the gain (or credit on the l
plus tax on the gain (or credit on the loss) on the sale of the capital asset (40%)ta((less incremental cost of t
Net incremental operating cash flow		0	0	0	0	0	0	0
Net present value of the project		$
Internal rate of return		$
Payback period			Years