Please answer in excel all questions on Homework chapter 11.Module 11 (Ch 11) Homework Module 11 (Ch...

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Please answer in excel all questions on Homework chapter 11.Module 11 (Ch 11) Homework Module 11 (Ch 11) Homework  Due Sunday by 11:59pm Points 10 Submitting a file upload Available until Apr 12 at 11:59pm  Submit Assignment Create an Excel spreadsheet to organize your answers to the following problem, and submit your Excel file as an  attachment by clicking on the appropriate button on this page.  A company is evaluating the purchase of a machine to improve product quality and output levels. The new machine would cost  $1.6 million and would be depreciated for tax purposes using the straight-line method over an estimated six-year life to its  expected salvage value of $100,000. The new machine would require an addition of $70,000 to working capital at the  beginning of the project, which will of course be returned to the firm at the end of the project. In each year of the machine's life,  the machine would increase the company's pre-tax cash receipts by $400,000 from their current level. During each of the six  years, cash operating costs would increase by $15,000 from their current level.  In addition, at the end of the 4th year, a major  repair of the machine costing $40,000 (pre-tax) would be required. The company has a 8% overall cost of capital and is in the  35% marginal tax bracket. Part 1: Prepare a Cash Flow Spreadsheet that identifies the incremental cash flows for each year of the machine's life.  Part 2: Calculate the investment's net present value (NPV). Part 3: Calculate the investment's internal rate of return (IRR). Part 4: Should the company purchase the machine? Why or why not?   PowerPoint Presentation Chapter 11 Capital Budgeting Welcome to chapter 11 on capital budgeting. Having determined the cost of capital in chapter 10, we now turn to the specific steps involved in determining whether or not invest in a certain project.  This process is called capital budgeting.  * Capital Budgeting Defined 	The process of discovering, evaluating, and deciding whether to pursue investments in long-term assets When we think about it, capital budgeting is at the heart of what business firms do. They get money from investors, and use this money to invest in assets that promise to yield returns higher than what they paid for the money. This chapter attempts to quantify this process in a reasonable way.  * The Importance of Capital Budgeting 	It involves large amounts of money 	It has a major impact on financing needs 	It has long-lasting effects on the firm’s competitive position This is just a reminder that capital budgeting does not operate in a vacuum. Instead, it is affected by a variety of things and affects other things as well.  * Eight Rules  Use cash flow numbers only  Use incremental numbers only  Include changes in every functional area  Include changes across the full life cycle  Include forecasted inflation  Consider the impact on quality   Consider the implicit options   Do not include financing cash flows Of these 8 rules, perhaps the last one is the most confusing for students. The point here is that we should not include the cash flows associated with principal and interest payments on borrowed funds because these cash flows are already implicitly accounted for in the interest rate used to discount the cash flows.  * Three Categories of Cash Flows Time Zero Cash Flows Annual Cash Flows from Operations Terminal Cash Flows  It is in this chapter where we start making considerable use of the cash flow spreadsheet that was introduced earlier in the course. You will notice that the spreadsheet, as presented on page 274 of the textbook, has three columns representing the three types of cash flows that might occur. Quite often, the annual cash flows will be an annuity that can be dealt with quite easily.  * Time Zero Cash Flows 	Cash flows from purchasing an asset 	Cash flows from selling an existing asset 	Working Capital outlay As we think about the cash flows at time zero, we need to remember that there may be tax implications of selling an old asset that may be included in this category as well. So, in other words, when we sell an asset, there are two kinds of cash flows that take place. First is the cash coming in from the sale, and second is the tax payment or benefit from the recognition of the gain or loss on the sale. Both of these need to be accounted for.  * Annual Cash Flows from Operations Changed inflows and/or outflows over the lifetime of the new and/or old assets Taxes paid or saved due to the changed operating cash flows Tax savings from depreciation On a year-to-year basis, we need to account for both the regular cash flows and the tax effects of those cash flows.  And then we will also have the tax savings brought about by the depreciation of the asset. Please remember that depreciation is not itself a cash flow, but it does save the company in taxes. Thus the depreciation times the tax rate is called a tax shield, and this amount can be added in the spreadsheet as a cash inflow on an annual basis.  * Terminal Cash Flows Sale price of asset  Tax based on sale  Return of working capital And then at the end of the project we typically have the items that pertain to the winding up of the project.  Again, only the incremental amounts show up in the spreadsheet. * Common Changes to Cash Flows in Capital Budgeting Here is a very detailed account of the various cash flows associated with a typical project, along with how each of these cash flows is treated in the cash flow spreadsheet. We have pretty much addressed each of these in the previous slides.  If you have trouble reading this, page 273 has a more readable table. * Sheet1 		 								Cash flow		Treatment 						Cash flows from purchasing an asset		Initial cost		Cash outflow when purchased 								Tax savings due to depreciation		Cash inflow (reduced outflow) each year depreciation may be taken 								Terminal value		Cash inflow when the asset is sold (adjusted by tax if a capital gain or loss is reported) 						Cash flows from selling an existing asset		Sale price		Cash inflow when sold 								Tax on sale		Cash outflow if a gain on sale is reported; cash inflow (reduced outflow) if a loss on sale is reported 								Tax savings forgone due to no longer being able to depreciate the asset		Cash outflow (increased taxes) each year depreciation would have been taken if the asset were not sold 								Terminal value forgone from no longer having the asset to sell on its original termination date		Cash outflow (lost cash inflow) 						Cash flows from operations		Changed recepits or payments from having the new asset and/or not having the old asset		Cash inflows and/or outflows over the lifetime of the new and/or old asset(s) 								Taxes paid or saved as changed receipts and payments enter the tax return as changes to income		Cash inflows and/or outlfows over the lifetime of the new and/or old asset(s) 						Cash flows from the investment in supporting working capital		The cost of acquiring additional working capital when a new asset is puchased		Cash outflow when the asset, and hence the supporting working capital, is purchased 								The cash from selling working capital no longer required when an asset is sold		Cash inflow when the asset, and hence the supporting working capital, is sold Sheet2 		 Sheet3 		 B S O W 	Time 0	Years  1-X	Year  X 	Buy 	Sell 	Operating Flows 	Working Capital In an attempt to help us remember the items to think about in the cash flow spreadsheet, I have devised this short memory aid. These are the major headings of the items that may need to go into the spreadsheet. The depreciation tax shield would normally go in the Buy or Sell categories. The spreadsheet can, of course, by used for analyzing the purchase of a new asset or a proposal to replace an old asset with a new asset.  * NPV Method 	The present value of all benefits less the present value of all costs 	Decision rule: Accept if NPV > 0 Reject if NPV  cost of capital Reject if IRR

Meenakshee · Accepted Answer

Sheet1
	Part-1    Cash Flow Statement
								Currency in $
	Particulars	Years
		0	1	2	3	4	5	6
	Machine Cost	-1600000.00
	Salvage value							100000.00
	Working Capital	-70000.00						70000.00
	Incremental Cash receipts		400000.00	400000.00	400000.00	400000.00	400000.00	400000.00
	Incremental Operating Costs		-15000.00	-15000.00	-15000.00	-15000.00	-15000.00	-15000.00
	Depreciation		-250000.00	-250000.00	-250000.00	-250000.00	-250000.00	-250000.00
	Major Repair on Machine		0.00	0.00	0.

Module 11 (Ch 11) Homework Module 11 (Ch 11) Homework Due Sunday by 11:59pm Points 10 Submitting a file upload Available until Apr 12 at 11:59pm Submit Assignment Create an Excel spreadsheet to...

Answer To: Module 11 (Ch 11) Homework Module 11 (Ch 11) Homework Due Sunday by 11:59pm Points 10 Submitting a...

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