Reference no: EM131888514

Assignment- Capital Budgeting

• Submit using Assignment tab in eLearning by uploading your completed excel file.

• Open a new (fresh) excel workbook to perform you work and make sure you highlight each answer and submit the same file you performed your calculations in.

• Your excel file has to be named to reflect your name and the assignment number (for example I may name my file: elashmawiamalA7)

• You are allowed only one submission, so please make sure it is the correct one.

• Work independently and do not use class exercise template (or any other template)

• This assignment is due before midnight on 3/3

• The deadline for late submission and partial credit is midnight 3/4. No submission will be accepted beyond that date and time.

A company is considering the purchase of a new machine that will enable it to increase its expected sales. The machine will have a price of $100,000. In addition, the machine must be installed and tested. The costs of installation and testing will amount to $10,000. The machine will be depreciated using 3-years MACRS. (Use MACRS table from class excel exercise by copying the table and pasting it)

The equipment will be operated for 5 years. The sales in the first year of operation are expected to be $260,000. Then, sales will grow by 3% a year. The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus variable operating costs equal to 70% of sales.

To support the increased level of production, the inventory of raw materials will have to be increasedfrom $30,000 to $50,000 when the machine is purchased. The additional inventory will be carried until the machine is scrapped following the 5 years of operation.

At the end of the 5-year operating life of the project, it is assumed that the equipment will be sold for $40,000.

The tax rate is 40% and the company's weighted average cost of capital is 9%.

Build a capital budgeting model to answer the following questions:

1) What is the operating cash flow in year 1-5?
2) What is the initial outlay in year 0?
3) What is the after tax salvage at the terminal year?
4) Calculate NPV and PI for the project.