Net Present Value and Salvage Value - 1144 Words

------------------------------------------------- FINC5001 Capital Market and Corporate Finance ------------------------------------------------- Workshop 5 – Capital Budgeting II 1. Basic Concepts Review a) In applying Net Present Value, what factors do we include, and what factors do we ignore? Use cash flows not accounting income Ignore * sunk costs * financing costs Include * opportunity costs * side effects * working capital * taxation * inflation 2. Practice Questions a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated†¦show more content†¦At present the company owns and operates the Black Pearl as its main ship but is considering replacing it with a new ship called the Flying Dutchman, a much larger vessel. The CEO of EITC Ltd, Mr Cutler Beckett, has appointed you to evaluate the proposal for the Board. If the Board decides to go ahead with the project the Black Pearl will be immediately sold and replaced by the Flying Dutchman. The Flying Dutchman would then operate for 5 years. Last year EITC Ltd commissioned the consulting group Swan and Co. to evaluate the potential of the new vessel. This report cost $500,000 and was delivered last month. The finance department of EITC used the findings of that report to provide you with the following information about the two vessels: Black Pearl 1. Original purchase price: $15 million 2. Years since the purchase: 5 years 3. Depreciation rate: 15% per year 4. Salvage value this year: $2 million 5. Salvage value in 5 years: $300,000 6. Revenue each year: $6.5 million 7. Operating costs each year: $4.2 million Flying Dutchman 1. Purchase price this year: $18 million 2. Depreciation rate: 12.5% per year 3. Estimated salvage value in 5 years: $10 million 4. Revenue each year: $10.8 million 5. Operating costs each year: $3.5 million The following additional information is also available about EITC Ltd and the current market: 1.Show MoreRelatedCh8 Bethesda Mining Comapny1004 Words   |  5 PagesBethesda Mining Company To be able to analyze the project, we need to calculate the project’s NPV, IRR, MIRR, Payback Period, and Profitability Index. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell 600,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 600,000 tons, plus the spot marketRead MoreEssay on Capital 20Budget 20Analysis 20Group 20P1648 Words   |  7 Pagesoverview of the general capital budgeting process and how it is implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. 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