In: Accounting
Project 2: Capital Budgeting Activity
Scenario:
Your client owns a successful restaurant in downtown Chicago (at
least pre-Covid-19!). She wants to open a second restaurant in the
suburbs and has asked you to help her choose between two locations.
Key information is listed below. Using the four capital budgeting
methods that we know, prepare a presentation that shows your
recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
Forest Park (10% tx rate) | Rosemont (10.25% tx rate) | |
Annual Cash Flows | $1,000,000 | $1,100,000 |
Annual Cash Outflows | $400,000 | $650,000 |
# years of expected useful life of project | 25 | 30 |
Annual non-cash (all depreciation) expenses:
Use straight line depreciation to find!
For both, assume no residual value and: 9% discount rate
REQUIREMENTS:
Calculate the following and note each formula
Kindly give a positive review and in case of
clarifications,kindly ask in comments.
I have first solved Forest Park and then Rosemount.
Preferred option is Forest Park.
Further,It has been assumed that annual cash outflows and inflows
given are before taxes.
Forest Park | Present Value Annuity Factoring | ||
Year 0 | (2,500,000.00) | 1 | (2,500,000.00) |
Year 1-25 | 550,000.00 | $9.82 | 5,401,000.00 |
NPV | 2,901,000.00 | ||
Cashflow per year | |||
=(Annual Cash Inflow-Annual Cash outflow-Depreciation)*(1-tax rate))+(Depreciation) | |||
=((1000000-400000-(2500000/25))*0.9)+(2500000/25) | |||
550,000.00 | |||
Payback Period | |||
=Initial Investment/Annual Net Cashflows | |||
=2500000/550000 | |||
4.55 | |||
Profitability Index | |||
=Initial Investment+NPV/Initial Investment | |||
=(2500000+2901000)/2500000 | |||
2.16 | |||
IRR | 22% | =IRR(Select below values) | |
Year | Amount | ||
0 | (2,500,000.00) | ||
1 | 550,000.00 | ||
2 | 550,000.00 | ||
3 | 550,000.00 | ||
4 | 550,000.00 | ||
5 | 550,000.00 | ||
6 | 550,000.00 | ||
7 | 550,000.00 | ||
8 | 550,000.00 | ||
9 | 550,000.00 | ||
10 | 550,000.00 | ||
11 | 550,000.00 | ||
12 | 550,000.00 | ||
13 | 550,000.00 | ||
14 | 550,000.00 | ||
15 | 550,000.00 | ||
16 | 550,000.00 | ||
17 | 550,000.00 | ||
18 | 550,000.00 | ||
19 | 550,000.00 | ||
20 | 550,000.00 | ||
21 | 550,000.00 | ||
22 | 550,000.00 | ||
23 | 550,000.00 | ||
24 | 550,000.00 | ||
25 | 550,000.00 | ||
Rosemount
Rosemont | Present Value Annuity Factoring | ||
Year 0 | (2,500,000.00) | 1 | (2,500,000.00) |
Year 1-30 | 412,416.67 | $10.27 | 4,235,519.17 |
NPV | 1,735,519.17 | ||
Cashflow per year | |||
=(Annual Cash Inflow-Annual Cash outflow-Depreciation)*(1-tax rate))+(Depreciation) | |||
=((1100000-650000-(2500000/30))*0.8975)+(2500000/30) | |||
412,416.67 | |||
Payback Period | |||
=Initial Investment/Annual Net Cashflows | |||
=2500000/412416.67 | |||
6.06 | |||
Profitability Index | |||
=Initial Investment+NPV/Initial Investment | |||
=(2500000+1735519.17)/2500000 | |||
1.69 | |||
IRR | 16% | ||
Year | Amount | ||
0 | (2,500,000.00) | ||
1 | 412,416.67 | ||
2 | 412,416.67 | ||
3 | 412,416.67 | ||
4 | 412,416.67 | ||
5 | 412,416.67 | ||
6 | 412,416.67 | ||
7 | 412,416.67 | ||
8 | 412,416.67 | ||
9 | 412,416.67 | ||
10 | 412,416.67 | ||
11 | 412,416.67 | ||
12 | 412,416.67 | ||
13 | 412,416.67 | ||
14 | 412,416.67 | ||
15 | 412,416.67 | ||
16 | 412,416.67 | ||
17 | 412,416.67 | ||
18 | 412,416.67 | ||
19 | 412,416.67 | ||
20 | 412,416.67 | ||
21 | 412,416.67 | ||
22 | 412,416.67 | ||
23 | 412,416.67 | ||
24 | 412,416.67 | ||
Related SolutionsProject 2: Capital Budgeting Activity Scenario: Your client owns a successful restaurant in downtown Chicago (at...Project 2: Capital Budgeting Activity
Scenario:
Your client owns a successful restaurant in downtown Chicago (at
least pre-Covid-19!). She wants to open a second restaurant in the
suburbs and has asked you to help her choose between two locations.
Key information is listed below. Using the four capital budgeting
methods that we know, prepare a presentation that shows your
recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
Forest Park (10% tx rate)
Rosemont (10.25%...
Capital Budgeting Activity Scenario: Your client owns a successful restaurant in downtown Chicago (at least pre-Covid-19!)....Capital Budgeting Activity Scenario: Your client owns a
successful restaurant in downtown Chicago (at least pre-Covid-19!).
She wants to open a second restaurant in the suburbs and has asked
you to help her choose between two locations.
Key information is listed below. Using the four capital
budgeting methods that we know, prepare a presentation that shows
your recommendation to your client (and why).
Initial Investment: 2,500,000 and use 9% discount rate
FOREST PARK (10% TX RATE)
ROSEMONT (10.25% TX RATE)...
Case Project Create a company. Your represents the capital budgeting committee of a successful firm. You...Case Project Create a company. Your represents the capital
budgeting committee of a successful firm. You have been invited to
the next Board of Directors meeting to present your analysis and
recommendation on a new capital project. Your presentation should
contain the following: 1. Brief description of the proposed capital
project 2. Estimation of the incremental cash flows related to the
project 3. Estimation of the weighted average cost of capital 4.
Financial evaluation of capital budget project (using NPV...
Case Project Your represents the capital budgeting committee of a successful firm. You have been invited...Case Project Your represents the capital budgeting committee of
a successful firm. You have been invited to the next Board of
Directors meeting to present your analysis and recommendation on a
new capital project. Your presentation should contain the
following: 1. Brief description of the proposed capital project 2.
Estimation of the incremental cash flows related to the project 3.
Estimation of the weighted average cost of capital 4. Financial
evaluation of capital budget project (using NPV or IRR) 5....
Your represents the capital budgeting committee of a successful firm. You have been invited to the...Your represents the capital budgeting committee of a successful
firm. You have been invited to the next Board of Directors meeting
to present your analysis and recommendation on a new capital
project. Your presentation should contain the following: 1. Brief
description of the proposed capital project 2. Estimation of the
incremental cash flows related to the project 3. Estimation of the
weighted average cost of capital 4. Financial evaluation of capital
budget project (using NPV or IRR) 5. Recommendation to...
6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting...6) Refer to the capital budgeting narrative. What is the MIRR of
the project?
Capital Budgeting Narrative:
(Use the following information for questions referring to the
narrative): Aferine Electric is considering a new project. The
initial investment required is $106,639.60 and the cost of capital
is 8%. Expected cash flows over the next four years are given
below:
Years
Cash Flow ($)
1
7,000
2
37,000
3
41,000
4
90,000
A) 17.1%
B) 13.8%
C) 14.1%
D) 15.0%
E) 8%
You are evaluating a capital budgeting project for your company that is expected to last for...You are evaluating a capital budgeting project for your company
that is expected to last for six years. The project begins with the
purchase of a $1,200,000 investment in equipment. You are unsure
what method of depreciation to use in your analysis, straight-line
depreciation or the 5-year MACRS accelerated method. Straight-line
depreciation results in the cost of the equipment depreciated
evenly over its life. The 5-year MACRS depreciation rates are 20%,
32%, 19%, 12%, 11%, and 6%. Your company's WACC...
Capital Budgeting and Risk Analysis * From the e-Activity, analyze the reasons why the short-term project...Capital Budgeting and Risk Analysis
* From the e-Activity, analyze
the reasons why the short-term project that you have chosen might
be ranked higher under the NPV criterion if the cost of capital is
high, while the long-term project might be deemed better if the
cost of capital is low. Determine whether or not changes in the
cost of capital could ever cause a change in the internal rate of
return (IRR) ranking of two (2) projects.
* From the...
Exercise Example - Capital Budgeting Project Analysis - Chapter 5 As director of capital budgeting, you...Exercise Example - Capital Budgeting Project Analysis - Chapter
5
As director of capital budgeting, you are reviewing three
potential investment projects with the following cost and cash flow
projections.
Cash Flow
Project A
Project B
Project C
Investment Cost
($500,000)
($375,000)
($475,000)
Year One Cash Flow
$200,000
$175,000
$250,000
Year Two Cash Flow
$180,000
$50,000
$200,000
Year Three Cash Flow
$100,000
$50,000
$75,000
Year Four Cash Flow
$80,000
$50,000
$30,000
Year Five Cash Flow
$140,000
$300,000
$30,000
Calculate the...
(1) What is capital budgeting? (2) Explain the difference between independent project and mutually exclusive project....
(1) What is capital budgeting?
(2) Explain the difference between independent project and mutually
exclusive project.
(3) Identify six methods to rank a project or methods used in
capital budgeting.
(4) Identify three methods to estimate the cost of equity?
(5) Do you agree that the three methods will give similar results
when the cost of equity is estimated?
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