Writing from Scratch
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 APA standards for this project. __________________________________________________________________The parameters for the 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.
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Writing from Scratch
Sample Solution
Calculations:
Net Property, Plant, and Equipment (NPPE): Let’s assume that the firm’s balance sheet shows a figure of $500,000 for NPPE. 10% of this figure would be $50,000.
Annual Depreciation: The cost of the equipment is $50,000, and the salvage value is 5% of the cost, which is $2,500. The depreciable base is therefore $47,500 ($50,000 – $2,500), and since the equipment has an estimated life of 12 years, the annual depreciation would be $3,958.33 ($47,500 ÷ 12).
EBIT to Free Cash Flow Conversion: To convert EBIT to free cash flow, we need to subtract the taxes and the capital expenditures from the EBIT. The tax rate given in the project is 35%.
Free cash flow = EBIT x (1 – Tax rate) + Depreciation – Capital expenditures
Capital expenditures = Cost – Salvage value = $50,000 – $2,500 = $47,500
Free cash flow = 0.18 x (1 – 0.35) + $3,958.33 – $47,500 = -$36,063.60
NPV, IRR, and Discounted Payback Period: Assuming a WACC of 10…ORDER A COMPREHENSIVE ANSWER
