Capital Budgeting Caw, Spring 2016 in December of 20X1, Balloon Popper Inc. was
ID: 2470561 • Letter: C
Question
Capital Budgeting Caw, Spring 2016 in December of 20X1, Balloon Popper Inc. was trying to deckle whether to add a new Ine of so per ttrong balloons to its product line. In order to do this, it would need to buy a new siicone pouring machine (cost below). Sales for the new balloons were expected to be $2000000 per year from which sales commissions were to be paid to Balloon Poppers sales agents (see below) Direct manufacturing costs were budgeted at $600,000 for materials, and $900,000 for labor The new equipment would (cost below) will have a disposal value of $50,000. I have posted the column you should use for your Information in Blackboard in Grades, under column. Write the number you are assigned on the top of your solution. From Blackboard Gradebook. Determine if you are using column 1, 2, 3, or 4 1 Ignoring taxes, what is the IRR of the project? What is the NPV of the new project? Assume the machinery will be Installed on January 1 of 20x1 and be depreciated using the straight line method, (it is easiest to calculate IRR using Excel) 2. Assuming a 40% tax rate, and that according to the IRS this is a 5 year asset (MACRS rates fcx Yr 1.2, YR 2.32, YR 3.192, YR 4.115, YS 5.115, YR 6 058), what is the IRR? What is the NPV? 3. To stimulate industrial development, the tax rules allow 60% of the asset cost to be deducted the first year, with the remaining f the asset cost to be deducted equally over the remaining 4 years (since it is considered to be a 5 year asset). What is the IRR. What is the NPV? 4. If Baloon Popper requires a 12 % return on all new investments, should they take on this investment? 5. What is the payback period? 6. What is the accounting rate of return? 7. Do you believe you should invest In the project? Why? You will be graded 80% on accuracy and 20% on clarity of your Findings. If I have to hunt for your answers, or it is not dear how you got your answers, I win take off points.Explanation / Answer
Answer 1-A Sales Material Labor Sales commision Depreciation Net Income Cash Inflow PVIFA @11%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = E+F H I = G*H 2000000 600000 900000 100000 290000 110000 400000 3.696 1478400 Disposal value 50000 PVIF @ 11% 5 Years 0.593 29650 29650 1508050 Less Intial Investment 1500000 NPV 8050 IRR approximately 11% 1-B NPV of the project @ 7% Sales Material Labor Sales commision Depreciation Net Income Cash Inflow PVIFA @7%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = E+F H I = G*H 2000000 600000 900000 100000 290000 110000 400000 4.100 1640000 Disposal value 50000 PVIF @ 11% 5 Years 0.713 35650 35650 1675650 Less Intial Investment 1500000 NPV 175650 NPV of the project will be $ 175650 Answer 2-A Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow PVIF @7%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E J K=I*J 2000000 600000 900000 100000 300000 100000 40000 60000 360000 0.935 336600 2000000 600000 900000 100000 480000 -80000 -32000 -48000 432000 0.873 377136 2000000 600000 900000 100000 288000 112000 44800 67200 355200 0.816 289843 2000000 600000 900000 100000 172500 227500 91000 136500 309000 0.763 235767 2000000 600000 900000 100000 172500 227500 91000 136500 309000 0.713 220317 Total value 1459663 Disposal value 50000 PVIF @ 7% 5 Years 0.713 35650 35650 1495313 Less Intial Investment 1500000 NPV -4687 IRR approximately 7% 2-B NPV of the project @ 7% Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow PVIF @7%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E J K=I*J 2000000 600000 900000 100000 300000 100000 40000 60000 360000 0.935 336600 2000000 600000 900000 100000 480000 -80000 -32000 -48000 432000 0.873 377136 2000000 600000 900000 100000 288000 112000 44800 67200 355200 0.816 289843 2000000 600000 900000 100000 172500 227500 91000 136500 309000 0.763 235767 2000000 600000 900000 100000 172500 227500 91000 136500 309000 0.713 220317 Total value 1459663 Disposal value 50000 PVIF @ 7% 5 Years 0.713 35650 35650 1495313 Less Intial Investment 1500000 NPV -4687 NPV of the project will be $ -4687. which is near zero. 3-A Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow PVIF @8%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E J K=I*J 2000000 600000 900000 100000 870000 -470000 -188000 -282000 588000 0.926 544488 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.857 255386 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.794 236612 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.735 219030 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.681 202938 Total value 1458454 Disposal value 50000 PVIF @ 8% 5 Years 0.681 34050 34050 1492504 Less Intial Investment 1500000 NPV -7496 IRR approximately 8% 3-B NPV of the project @ 7% Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow PVIF @7%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E J K=I*J 2000000 600000 900000 100000 870000 -470000 -188000 -282000 588000 0.935 549780 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.873 260154 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.816 243168 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.763 227374 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.713 212474 Total value 1492950 Disposal value 50000 PVIF @ 7% 5 Years 0.713 35650 35650 1528600 Less Intial Investment 1500000 NPV 28600 NPV of the project will be $ 28600. Answer 4 NPV of the project @ 12% Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow PVIF @12%, 5years Pv of cash Inflow A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E J K=I*J 2000000 600000 900000 100000 870000 -470000 -188000 -282000 588000 0.893 525084 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.797 237506 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.712 212176 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.636 189528 2000000 600000 900000 100000 145000 255000 102000 153000 298000 0.567 168966 Total value 1333260 Disposal value 50000 PVIF @ 7% 5 Years 0.567 28350 28350 1361610 Less Intial Investment 1500000 NPV -138390 NPV of the project will be $ -138390 under new tax plan. So company should not accept this project. Answer 5 Pay back period Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income Cash Inflow Cash Flow Needed Year A B C D E F = A-B-C-D-E G = F*40% H = F-G I = H+E 2000000 600000 900000 100000 870000 -470000 -188000 -282000 588000 588000 1 2000000 600000 900000 100000 145000 255000 102000 153000 298000 298000 1 2000000 600000 900000 100000 145000 255000 102000 153000 298000 298000 1 2000000 600000 900000 100000 145000 255000 102000 153000 298000 298000 1 2000000 600000 900000 100000 145000 255000 102000 153000 298000 18000 0.06 =18000/298000 = 0.06 years Pay Back period = 4.06 years under new tax plan Answer 6 Accounting rate of return Sales Material Labor Sales commision Depreciation Income Tax @ 40% Net Income A B C D E F = A-B-C-D-E G = F*40% H = F-G 2000000 600000 900000 100000 870000 -470000 -188000 -282000 2000000 600000 900000 100000 145000 255000 102000 153000 2000000 600000 900000 100000 145000 255000 102000 153000 2000000 600000 900000 100000 145000 255000 102000 153000 2000000 600000 900000 100000 145000 255000 102000 153000 Total 330000 Average Income = 330000/5 = 66000 Accounting rate of return = Average Income/ Intital Investment = 66000/1500000 = 4.40% Answer 7 Under New Tax plan and required rate of capital is 7% , NPV is $ 28600 This is positive NPV, Hence project is acceptable.