Question

Signature Assignment - Capital Budgeting Course Project Work must be done in Excel. Please show formulas if possible so I can get a true understanding of the deliverables.

You have recently assumed the role of CFO at your company. The company's CEO is looking to expand its operations by investing in new property, plant, and equipment. You are asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets.

Signature Assignment Parameters - select a company download the most recent copy of the company's 10-K report, and submit your company choice to your professor for approval. (I chose Apple's lastest 10-K from the SEC website FY ended 9/28/19) which was approved by my instructor.

The parameters for the week 7 project deliverable are as follows.

The firm 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 figure that appears on the firm's balance sheet.)

The estimated life 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 increases in net working capital each year. Use 35% as the tax rate in this project.

The hurdle rate for this project will be the WACC that you are able to find on a financial website, such as Gurufocus.com. If you are unable to find the WACC for a company, contact your instructor. He or she will assign you a WACC rate. (The WACC as of 6/13/20 was 6.93%)

Signature Assignment Deliverables

Prepare a narrated PowerPoint presentation that will highlight the following items.

Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project
Your calculations that convert the project's EBIT to free cash flow for the 12 years of the project.

The following capital budgeting results for the project:

Net present value, Internal rate of return, Discounted payback period.

Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project Once again, you may embed your Excel spreadsheets into your document. Be sure to follow

Answer 1

Calculations for the amount of property, plant, and equipment and the annual depreciation for the project

FY Sep. 28, 2019 balance sheet of Apple Inc. shows a balance of $ 37378 millions

so, CAPEX for expansion, ie. Initial investment =37378 *10%= 3738 millions

Estimated life of the new asset = 12 years

Annual straight-line depreciation= 3738 mlns/ 12= $ 311 .5 millions

Salvage value=5% of the initial investment, ie. 3738*5%= $ 186.9 millions---which means an after-tax cash flow of 186.9*(1-35%)= $ 121. 485 mlns.

Now looking into operating cash flows,

since we start from EBIT, which is after charging depreciation, depreciation will have only tax shield effect(Depreciation *Tax Rate%) on the below-shown cash flows.

OCF for the 12 yrs.	mlns.
EBIT(3738*18%)	672.84
Tax at 35%	-235.49
Earnings after tax	437.35
Add back:Depn.	311.50
Operating cash flow	748.85

Now calculating the year-wise FCFs for discounting

Year	0	1	2	3	4	5	6	7	8	9	10	11	12
1.Initial Investment	-3738
2.Annual OCF/FCF		748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85
3.After-tax salvage													121.485
4.Total Annual FCFs(1+2+3)	-3738	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	748.85	870.335
5.PV F at 6.93%(1/1.0693^yr.n)	1	0.93519	0.87458	0.81790	0.76489	0.71532	0.66896	0.62561	0.58506	0.54715	0.51169	0.47853	0.44751
6.PV at 6.93%(4*5)	-3738	700.318	654.931	612.486	572.792	535.67	500.954	468.487	438.125	409.731	383.177	358.344	389.4858
7.NPV at 6.93%(sum of Row 6)	2286.499
8.IRR(of FCF row 4)	17.11%
9. Discounted pay back:
10.Cumulative PVs(row 6)	-3738	-3037.68	-2382.8	-1770.3	-1197.5	-661.8	-160.85	307.637	745.762	1155.49	1538.67	1897.01	2286.499
11.Disc. P/B=
6+(160.85/468.4873)=
6.34
Years

Discussing the results :

1.Net present value of the expansion/acquisition is POSITIVE --$ 2286. 499 millions----hence will add value/ create welath to the firm & its owners.

2.IRR of the project, 17.11% > the weighted average cost of capital, 6.93% --hence profitable.

3..Discounted payback , 6.34 yrs.--ie. The project pays back, in almost less than half the life of the entire project.

Going by the above , the project can be ACCEPTED.