Please answer the questions from D-H. and i need more details of every steps the
ID: 2651877 • Letter: P
Question
Please answer the questions from D-H. and i need more details of every steps
the incewmwntal project cash flows must be done using excel The Semgin Corp. (SC) is considering adding a transducer, a new state-of-the-art piece of technology. This is but one of many projects being considered as part of the capital investment program for next year. YOU have been asked to perform a capital budgeting analysis of this project because of your widely known expertise, and because your enlightened CEO knows that it is imperative to utilize all of the tools at her disposal to ensure that she does not put the enterprise at risk financially. You have gathered the following information, some of which may aid you in your analysis: 1. The transducer's invoice price is $163.350. 1. The transducer's invoice price is $163,350. 2. Shipping charges from the manufacturer to SC would be $4,600. 3. It would cost $15,550 to install the system. 4. As a result of undertaking this project, SC would experience an increase of $23,000 in their inventory of supplies (a current asset), an S18,000 increase in accounts receivable (another current asset) because of increased billings, and a $10,000 increase in their accounts payable (a current liability) which would partially fund the increase in inventory 5. The transducer has an economic life of seven years, but is considered by the IRS to be a five year asset. It will be depreciated using the applicable MACRS schedule. 6. The expected salvage value at the end of the seven years is $23,500.Explanation / Answer
Incremental Cash flows for the next seven years of the project Details Amount Increase in Billing $18,000.00 Increase in Cost -$10,000.00 Incremental Inventory carrying cost -$336.70 Refer Note 1 Marketing Directors Salary ( Assumed that there is no incremental cost associated with it) $0.00 Incremental Cash flow before Dep & Tax $7,663.30 Less Tax @ 30% 2,298.99 Incremental Cash flow before Depreciation impact $5,364.31 Tax savings due to depreciation impact $9,600.00 Refer Note 2 Net Annual Cash inflow for the first 5 Years $14,964.31 Net Annual Cash inflow for the Next 2 Years $5,364.31 Net Present Value of cash inflows for the first 5 years $56,841.91 Refer Note 3 for Discounting Rate Net Present Value of cash inflows for the Next 2 years $5,807.88 Note 1 Additional Investment in Inventory $23,000.00 Less Funded by Accounts Payable $10,000.00 Investment to be funded from short term working capital Loan $13,000.00 Interest Rate assumed to be risk free rate $0.03 Interest Payout ( Inventory Carrying cost) $336.70 Working capital funding is considered as part of operating activities Note 2 Cost of the Asset Invoice Price $1,63,350.00 Shipping Charges $4,600.00 Installation Charges $15,550.00 Less residual Value -$23,500.00 $1,60,000.00 Depreciation as PER IRS rate over 5 years $32,000.00 Tax Savings on account of dep Impact $9,600.00 Note 3 Discounting Rate Risk Free Rate 2.59% Return on Market Portfolio 8.02% Beta of SC considering 35% Volatality 1.35 SC's required rate of return -Risk free Rate+( Return on Market portfolo-Riskfree Rate)*Beta 0.099205