Reference no: EM131245648 , Length: word count:2750
You are an external capital budgeting advisor to a highly successful manufacturing firm. You have recently received a proposal for equipment replacement that will presumably lead to more capacity and less cost. The replacement details are given below.
Old Equipment
|
New Equipment
|
Current book value
|
$ 400,000
|
|
|
Current market value
|
$ 600,000
|
Acquisition cost
|
$ 1,000,000
|
Remaining life (yrs.)
|
10
|
Life (yrs.)
|
10
|
Annual sales
|
$ 300,000
|
Annual sales
|
$ 450,000
|
Cash operating expenses
|
$ 120,000
|
Cash operating expenses
|
$ 150,000
|
Annual depreciation
|
$ 40,000
|
Annual depreciation
|
$ 100,000
|
Accounting salvage value
|
$ 0
|
Accounting salvage value
|
$ 0
|
Expected salvage value
|
$ 100,000
|
Expected salvage value
|
$ 200,000
|
If the new equipment replaces the old equipment, an additional investment of $80,000 in net working capital will be required. The tax rate is 30% and the required rate of return is 10%.
As you work through the NPV and IRR analysis provided by the company, you discover the following errors:
- The initial outlay correctly accounts for incremental investment in new fixed capital and net working capital but after-tax cash proceeds from the sale of old fixed capital are not adjusted.
- Annual operating cash flows are not adjusted for tax and depreciation is not added back.
- Terminal-year after-tax non-operating cash flows do not recapture investment in net working capital. Also, incremental capital gains on salvage value are not taxed.
You realise that you need to do the entire project feasibility report from scratch. You set out to do the following:
(a) Calculate the initial outlay, year on year after-tax operating cash flows, and terminal-year after-tax non-operating cash flow for the old and new equipment.
(b) Present these cash flows in a tabular format indicating the relevant year in which these cash flows fall. You believe the usage of a spreadsheet will be very helpful for this exercise.
(c) Find out the NPV, IRR, and Profitability Index for the replacement proposal.
(d) Conduct a sensitivity analysis of NPV to the required rate of return falling between the range of 10% to 16% pa (with increments of 1%).
(e) Tabulate your results. This step is required because there are some uncertainties at the top management level regarding the appropriate required rate of return to be used due to substantial decrease in risk-free rate over the years.
(f) Following the AIB assignment format, prepare an advisory report for the management that includes:
- a theoretical background to the three investment decision criteria you have used for analyses
- a comparison among these methodologies
- a note on why these criteria are superior to accounting rate of return and payback period used by some firms
- an analysis of the problem at hand and specific recommendations on the proposal, which integrates all the calculations and tabulations made in (a) to (d) above.
Propose two adjustments that you as a hr manager
: Propose two (2) adjustments that you as a HR manager can make to support the changes related to high-performance work systems, technological changes, and a change in the employment relationship. Justify your response.
|
List and explain some of the major reasons for plan failure
: There is much talk today about the demise of development planning. Many observers assert that development planning has been a failure. List and explain some of the major reasons for plan failures. Which reasons do you think are the most important?..
|
Describe the role that anthropologists play in migration
: Describe the role that anthropologists play in migration and include (3) relevant examples. Describe (2) key differentiators and provide (2) examples about anthropology compared with disciplines.
|
Distinguish between market failure and government failure
: Distinguish between market failure and government failure. Does rent-seeking behavior occur only as a result of government failure? Explain your answer ? What are some of the difficulties associated with the establishment of
|
Calculate the initial outlay
: You realise that you need to do the entire project feasibility report from scratch. You set out to do the following: Calculate the initial outlay, year on year after-tax operating cash flows, and terminal-year after-tax non-operating cash flow for t..
|
Why might people vote against it
: Explain the differences between characteristics of public goods and private goods and services. How can goods and services provided by nongovernmental organizations be considered in this framework?
|
What is the percentage change in the price of bonds
: If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? - what would be the percentage change in the price of these bonds?
|
Create a competitive advantage in the marketplace
: Examine the role of human resource management (HRM) in organizations and how it supports the organization's business strategy. Evaluate human resource strategies and how these strategies align with business strategies. Create a competitive advantage ..
|
Briefly explain what is meant by each of these concepts
: The effects of international trade on a country's development are often related to four basic economic concepts: efficiency, growth, equity, and stability. Briefly explain what is meant by each of these concepts as it relates to the theory of inte..
|