Capital Budgeting. Cost of Capital. Cash Flow NPV
Hi there,
This is really URGENT!! NEEDED BY THURSDAY NOON
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.
COST OF CAPITAL
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
EXISTING PRINTER
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
NEW PRINTER
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)
