Question

Ulta Beauty is looking to expand its operations by 10% of the firm's net property, plant, and equipment.Calculate this amount by taking 10% of the property, plant, and equipment. ($1,205,524)

The estimated live of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost. The annual EBIT for this new project will be 18% of the project's cost. The company will use the straight line method to depreciate this equipment. Also, assume that there will be no increase in net working capital each year. Use 35% as the tax rate.

The hurddle rate for this project will be the WACC= 9.15%.

*Please show the amount of property, plant, and equipment and the annual depreciation.

*Show the calculations that convert the EBIT to free cash flow for the 12 years of the project

* Following Capital Budget

-NPV, Internal Rate of Return, Discounted Payback Period

Does the results above include a recommendation for acceptance or rejection ?

Answer 1

# 1. Calculation of Property , Plant & Equipment (PPE) & Depreciation

A. Cost of PPE	$1205524
B. Salvage value( A*5%)	$60276
C.Depreciable amount(A-B)	$1145248
D. Esimated Life	12 years
E. Annual Depreciation(C/D)	$95437

Note- $ Amounts are rounded off to nearest $

Note- It is assumed that 10% of the total PPE is $1205524

#2 Calculation of EBIT and Free cash Flow

Particulars	1-11 years ($)	12 th Year ($)
EBIT (18% of $1205524)	$216994	$216994
Less: Income tax@35%	($75948)	($75948)
Earning After Tax	$141046	$141046
Add-Depreciation Annual	$95437	$95437
Add- Salvage value	-----	$60276
Free Cash Flow(FCF)	$236483	$296759

# Calculation of Net present Value or NPV

Particulars	Free Cash Flow(FCF)	[email protected]%	Present value
1-11 Years	$236483	6.757 (Cumulative for 11 years)	$1597916
12 th year	$296759	0.350	$103866
Total NPV			$1701782

# Calculation of discounted pay back period

Discounted Cash Inflow =	Actual Cash Inflow
(1 + i)n

Discounted Payback Period = A +	B
C

Where,
A = Last period with a negative discounted cumulative cash flow;
B = Absolute value of discounted cumulative cash flow at the end of the period A; and
C = Discounted cash flow during the period after A.

Discounted Payback Period Calculator

Period	Cash Flow($)	[email protected]%	pv of cash flow($)	Cumulative($)
0	-1205524	1	-1205524	-1205524
1	236483	0.916	216659	-988865
2	236483	0.839	198496	-790369
3	236483	0.769	181859	-608510
4	236483	0.705	166611	-441899
5	236483	0.645	152645	-289254
6	236483	0.591	139848	-149406
7(A)	236483	0.542	128125	-21281(B)
8	236483	0.496	117384(C)	96103
9	236483	0.455	107544	203647
10	236483	0.417	98529	302175
11	236483	0.382	90269	392445
12	296759	0.350	103781	496226
Discount Rate		9.15%
Discounted Payback		7.18	periods

Discounted pay back period = 7+ (21281/117384) = 7.18 YEARS

# Calculation of IRR or internal rate of return

IRR is the rate at which the PV of cash outlay will be equal with the discounted PV of cash inflow.

As the NPV more @9.15 % discount rate hence the IRR is more than 9.15%. Lets take IRR= 17%

then PV of cash inflow @17%=($236483 * PVF,17%, for 11 years) + ($296759 * PVF, 17%, 12th year)

=>($236483* 4.836) +($296759*0.152) = $1188739

Using interpolation interest rate = 9.15% +(( 17%-9.15%)/($1701782-$1188739) * ($1701782-$1205524) =

=> IRR = 9.15% +7.60% =16.75%

THE ABOVE RESULTS SHOWS TO ACCEPT THE PROJECT AS NPV IS MORE, IRR IS MORE THAN THE COST AND PAY BACK PERIOD IS LESS.