Book: Capital Budgeting: Theory and Practice (Page 47-48) Link: http://160592857
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Book: Capital Budgeting: Theory and Practice (Page 47-48)
Link: http://160592857366.free.fr/joe/ebooks/tech/Wiley%20Capital%20Budgeting%20Theory%20and%20Practice.pdf
Case for Section I THE VILLARD ELECTRIC COMPANY The financial manager of the Villard Electric Company, Fred Taylor, has presented his estimates of cash flows resulting from the possible investment in a new computer system, the Webnet. Mr. Taylor's estimates of net cash flows immediately and over the following four vears are as follows: First year hird Fo year econ Initial $200,000 Item year year Purchase of computer svstem Sale of computer system Tax on sale of computer system Acquisition and disposition cash flows -$200,000 Change in expenses Change in depreciation Change in taxable income Less: change in tax Change in income after tax Change in depreciation Change in operating cash filows Change in net cash flows S40,000 12,442 $0 $52,442 $50,000 $50,000 $50,000 $50,000 40,000 64,000 38.40023,040 $10,000 -$14,000 $11,600 $26,960 5,0404,1769,706 S6,400-$8,960 $7,424 S17,254 40,000 64,000 38.40023,040 $46,400 $55,040 $45,824 $40,294 $200,000 $46,400$55,040$45,824 |$92,736 $0 $0 3,600 Mr. Taylor has based his estimates on the following assumptions: .The cost of the system (including installation) is $200,000. . The system will be depreciated as a 5-year asset under the MACRS, but it will be sold at the end of the fourth year for S50,000 . Villard's expenses will decline by $50,000 in each of the four years ·The company's tax rate will be 36% . Working capital will not be affected. When he made his presentation to Villard's board of direc- tors, Mr. Taylor was asked to perform additional analyses to con- sider the following uncertainties: 47Explanation / Answer
Particularas Present estimate 20% Increase in Cost of System 20% Decrease in Cost of System Change in Expenses 30% higher Change in Expenses 20% Lower Tax rate of 30% Cost of System 200000 Net Change over Present estimate 240000 192000 Net Change over Present estimate 200000 Net Change over Present estimate 200000 Net Change over Present estimate 200000 Sale of Computer System 40000 40000 40000 40000 40000 40000 Tax on Sale of Computer System 12442 12442 12442 12442 12442 10368 Change in Net Cash Flows Year 0 -200000 -200000 -200000 -200000 -200000 -200000 1 46400 2880 49280 -2880 43520 9600 56000 -6400 40000 600 47000 2 55040 4608 59648 -4608 50432 9600 64640 -6400 48640 -840 54200 3 45824 2765 48589 -2765 43059 9600 55424 -6400 39424 696 46520 4 92736 1659 94395 -1659 91077 9600 102336 -6400 86336 1618 94354 Cost Of Computer 240000 192000 Change in Depreciation over present estimate Taxshield on change in depreciation Depreciation Change in Depreciation over present estimate Taxshield on change in depreciation Depreciation Year 0 1 8000 2880 -8000 -2880 2 12800 4608 -12800 -4608 3 7680 2765 -7680 -2765 4 4608 1659 -4608 -1659