Question

CAPITAL BUDGETING DECISION MAKING DATA
Cost of Project =		$180.00	m
Life of Project =		7	yrs
Use Stratight Line Depreciation to Book Value of ZERO.

This Project requires building a Mfg Plant in Ghana.
Plant will produce Bi-Cyle Parts.
In addition to Cost of Project, it is estimated that
ST Investment of $ 35m will be required, 90% of this
investment would be recoverable at the termination of
the Project.
Salvage Value of Plant at end of 7th yr =					$75.00	m

IMPACT OF THE PLANT
1	Revenue in the First year will be =				$50.00	m
2	Estimated Reve growth per yr =				10%
3	1st yr expenses =				$20.00	m
4	Estimated growth in Expenses per yr=				8%
	COMPANY POLICY
1	Use a Discount Rate of:			10%
2	The Company is in 21% Marginal Tax Bracket (MTB)
Questions:
1	First develop a Time-Line Digram and then calculate all of the
	CAPITAL BUDGETING Criteria.
2	Shoud this Project be accepted or not?
	Give your reasons based on the Capital Budgeting Criteria.

No diagram information was provided

Answer 1

1. Develop a Time-Line diagram.

Cash flow in the above diagram, is arrived at based on the below table -

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Sales - A		$    50.00	$    55.00	$    60.50	$    66.55	$    73.21	$    80.53	$    88.58
Operating expenses - B		$    20.00	$    21.60	$    23.33	$    25.19	$    27.21	$    29.39	$    31.74
Depreciation - C		$    25.71	$    25.71	$    25.71	$    25.71	$    25.71	$    25.71	$    25.71
Earnings Before Tax (A-B-C)		$      4.29	$      7.69	$    11.46	$    15.64	$    20.28	$    25.42	$    31.13
Less: Tax @21%		$      0.90	$      1.61	$      2.41	$      3.28	$      4.26	$      5.34	$      6.54
Profit After Tax		$      3.39	$      6.07	$      9.05	$    12.36	$    16.02	$    20.09	$    24.59
Add: Depreciation		$    25.71	$    25.71	$    25.71	$    25.71	$    25.71	$    25.71	$    25.71
Cash Flow		$    29.10	$    31.79	$    34.77	$    38.07	$    41.74	$    45.80	$    50.30
Capital expenditure	$ (180.00)							$    75.00
ST Investment	$    (35.00)							$    31.50
Free cash flow	$ (215.00)	$    29.10	$    31.79	$    34.77	$    38.07	$    41.74	$    45.80	$ 156.80

2) Should this Project be accepted or not.

To find out whether the project is acceptable or not, we have to find out the Net Present Value (NPV).

Below is the NPV calculation based on the Free cash Flow as computed as per 1)

	A	B	AxB
Period	Free cash flow	Discounting Factor @10%	Present Value
Year 0	$               (215.00)	1.000	$              (215.00)
Year 1	$                    29.10	0.909	$                   26.45
Year 2	$                    31.79	0.826	$                   26.27
Year 3	$                    34.77	0.751	$                   26.12
Year 4	$                    38.07	0.683	$                   26.00
Year 5	$                    41.74	0.621	$                   25.91
Year 6	$                    45.80	0.564	$                   25.85
Year 7	$                  156.80	0.513	$                   80.47
		NPV (Sum)	$                   22.08

Conclusion - Since NPV is positive, the project is viable and can be proceeded.