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    jazper's Avatar
    jazper Posts: 4, Reputation: 2
    New Member

    Feb 6, 2008, 02:56 PM
    Capital Budgeting. Cost of Capital. Cash Flow NPV
    Hi there,

    I tried to do this myself but just couldn’t find where to start.
    Any help would be very much appreciated.

    CAPITAL BUDGETING TECHNIQUES. This question is based on a case study in Fundamentals of corporate finance 4ed. Ross, Thomson, Christensen,… p409. Below are the details of the case.

    I have to recommend whether to buy the new printer or not using Capital Budgeting Techniques (NPV, IRR, Payback (discounted), ARR). Specifically, I don’t know what is the cost of capital. As WACC cannot be calculated as capital structure is missing in the question. Cannot calculate cost of equity as beta is not given in question. Cannot calculate preference share cost as no dividends and value for p is not given. Only the unsecured loan with interest rate of 8.75, which I then multiplied by .7 to get 6.125%. But this is far too easy, there must be something wrong.

    When I then proceed to the cash flow to calculate what interest rate should I use my calculated 6.125% or the average cost of funds (presumably average cost of capital) of 12% .

    Also, regarding the cashflow change to working capital. The case provides

    Cash in hand would have to increase by 300 000
    Acc Rec would increase by 1 680 000
    Inventory would decline by 280 000
    Acc Payable would increase by 490 000

    What do I have to do with this in order to get the changes to working capital right.


    Average cost of funds 12%
    Secured bank loan cost 8.75%
    Government Interest rate 6%
    Bank rate 8.75

    Expected return on market 16% with an expected variance of 9%
    Required level of return 12.6

    Acceptance rate 25%
    Funds must be recovered in 3 years


    Cost 6mil
    Depreciation 10%pa straight line
    Bought 3yrs ago
    Eco life 10yrs
    Remaining eco life 5yrs
    Proceeds when sold today (after 3yrs) 3.8mil
    Or when sold after further 5 yrs (total 8yrs) 1.3


    Cost 10mil
    Installation cost 600,000.— tax deductable immediately
    Depreciation 5yrs (ecolife) reducing balance method
    Proceeds after ecolife 2 mil
    Termination of lease (opportunity cost) 150,000.—in order to use new printer current lease agreement must be cancelled (reduction of income)
    CliffARobinson's Avatar
    CliffARobinson Posts: 1,416, Reputation: 101
    Ultra Member

    Mar 7, 2012, 05:16 PM
    When it comes to homework and study assignments, we have a policy of helping students through their work. I have found a chapter from "Corporate Finance", which is an MBA text written by Dr Rodney Boehme. It offers you a great primer to help complete your work.

    If you get stuck, let us know.

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