Capital Budgeting Examples

Sale Less: COGS

1,000,000 (550,000) 450,000

GP Less: OE Misc exp Electric exp

150,000 70,000 NP

(220,000) 230,000

Per month Operating Cost (Exp) Operating Cost (Exp)

Less

Less

Add

100,000 Old AC 70,000 New AC 30,000 Benefit / Saving/ Income

Depreciation

(3,000) 180,000 / 60

Net benefit / saving

27,000

Income Tax (40%)

(10,800)

Benefit after I/ Tax

16,200

Depreciation

3,000

Cash Inflow

19,200

Cash In flow = Benefit - Depreciation - Income Tax + Depreciation

IT 40% 92,000

Depreciation

138,000

100,000 Operating Cost Old asset New Asset

Year 1 2 3 4 5 6 7 8 9 10

625,000 630,000 635,000 645,000 655,000 660,000 662,000 670,000 676,000 680,000

600,000 590,000 595,000 605,000 620,000 630,000 637,000 650,000 661,000 670,000

Benefit

Depreciation

25,000 40,000 40,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 280,000

10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 100,000

Req # 2 Pay Back period Year

Cash Inflow Needed 1 2 3 4 5 6 7 8

22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000

Amount Balance

(100,000) (78,000) (56,000) (34,000) (12,000) -

(78,000) (56,000) (34,000) (12,000)

Pay back Years 1 2 3 4

9 22,000 10 22,000 Payback period = Pay back period =

4.5455

0.8929 x 12 months 0.7148 x 30 days

3 years, 10 months and 21 days

When EvenCash Inflow: Payback period =

Cash outflow Cash Inflow per year 100,000 22,000

4.5455

Net Benefit

I Tax 40%

15,000 30,000 30,000 30,000 25,000 20,000 15,000 10,000 5,000 180,000

6,000 12,000 12,000 12,000 10,000 8,000 6,000 4,000 2,000 72,000

12,000 22,000

0.5455

Benefit after tax 9,000 18,000 18,000 18,000 15,000 12,000 9,000 6,000 3,000 108,000

Depreciation 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000

Cash Inflow 19,000 28,000 28,000 28,000 25,000 22,000 19,000 16,000 13,000 10,000

0.55 #DIV/0! x 12 months

9 x 12 months 8 x 30 days

10.7148 21

1.68

Req # 3 Discounted Pay Back period Year

Cash Inflow

1 2 3 4 5 6 7 8 9 10

P.V. Factor 12%

Discounted Cash Inflow

Amount Needed Balance

22,000 0.8929 19,643 (100,000) (80,357) 22,000 0.7972 17,538 (80,357) (62,819) 22,000 0.7118 15,659 (62,819) (47,160) 22,000 0.6355 13,981 (47,160) (33,178) 22,000 0.5674 12,483 (33,178) (20,695) 22,000 0.5066 11,146 (20,695) (9,549) 22,000 0.4523 9,952 (9,549) 22,000 0.4039 8,885 22,000 0.3606 7,933 22,000 0.3220 7,083 9,549 0.9595 6.9595 9,952 Discount pay back period = 5.7899 years 0.7899 x 12 months 0.4788 x 30 days Discounted Pay back period = 5 years, 9 months and 14 days

Discounted Payback period =

Cash outflow (Cash inflow per year x cummulative PV Factor) 100,000 (22,000 x 5.6502) 100,000 12,430

8.0448

Pack back Years 1 2 3 4 5 6

9.4788 14

low ulative PV Factor)

Req no. 4: Net Present Value Years Cash Flow P.V. Factor 12%

0 1 2 3 4 5 6 7 8 9 10

(100,000) 19,000 28,000 28,000 28,000 25,000 22,000 19,000 16,000 13,000 10,000 Net Present Value

Net Present Value

1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220

Pv of Cash outflow (100,000) x 1 PV of Cash Inflow (Cash inflow per year x cummulative PV Factor) (22,000 x 5.6502) NPV

(100,000) 16,964 22,321 19,930 17,795 14,186 11,146 8,595 6,462 4,688 3,220 25,306 (100,000)

124,305 24,305

5.6502

Req no. 4: Internal rate of return

Years

0 1 2 3 4 5 6 7 8 9 10

Cash Flow

P.V. Factor 12%

(100,000) 1 19,000 0.8929 28,000 0.7972 28,000 0.7118 28,000 0.6355 25,000 0.5674 22,000 0.5066 19,000 0.4523 16,000 0.4039 13,000 0.3606 10,000 0.3220 Net Present Value

NPV

P.V. Factor 13%

### 16,964 22,321 19,930 17,795 14,186 11,146 8,595 6,462 4,688 3,220 25,306

IRR = % of +ve NPV + (Diff. in % x (

1 0.8850 0.7831 0.6931 0.6133 0.5428 0.4803 0.4251 0.3762 0.3329 0.2946

Amount of +ve NPV Amount of +ve NPV - Amount of -ve N

Internal rate of return = 13% + (7% x 20,825 / 20,825 + 4,443) Internal rate of return = Internal rate of return =

0.1877 x 100 18.77 %

NPV

(100,000) 16,814 21,928 19,405 17,173 13,569 10,567 8,076 6,019 4,328 2,946 20,825

P.V. Factor 20%

1 0.8333 0.6944 0.5787 0.4823 0.4019 0.3349 0.2791 0.2326 0.1938 0.1615

Amount of +ve NPV nt of +ve NPV - Amount of -ve NPV

25 / 20,825 + 4,443)

NPV

(100,000) 15,833 19,444 16,204 13,503 10,047 7,368 5,303 3,721 2,519 1,615 (4,443)

Example of M& U book Year 1 2 3 4 5 6 7 8

Benefit 33,712 26,019 31,788 29,865 24,096 27,942 26,019 26,019

Depreciation Net Benefit I Tax 48% 9,312 9,312 9,312 9,312 9,312 9,312 9,312 9,312

24,400 16,707 22,476 20,553 14,784 18,630 16,707 16,707

11,712 8,019 10,788 9,865 7,096 8,942 8,019 8,019

Benefit after taxDepreciation

Cash Inflow

12,688 9,312 22,000 8,688 9,312 18,000 11,688 9,312 21,000 10,688 9,312 20,000 7,688 9,312 17,000 9,688 9,312 19,000 8,688 9,312 18,000 8,688 9,312 18,000 Cash inflow during the project 153,000 Add: Salvage Value 8,300 Net Cash inflow during the project 161,300

Average return on Orignal Investment a) Return Cash inflow during the project, excluding S.V. Less: Depreciation (Total) Net income after depreciation b) Average Return Average return ( Per year )=

208,000 (100,000) 108,000 Return

Net Income after depreciation Economic Life

c) Average return on Original Investment Average return on Original Investment =

Average return Original Investment

108,000 = 10

x 100

=

Average return on Average Investment a) Cash inflow during the project, excluding S.V. Less: Depreciation (Total) Net income after depreciation b) Average return =

208,000 (100,000) 108,000

Net Income after depreciation Economic Life

c) Average return on Average Investment = Average Investment Original Investment

108,000 =

10

Average return Average Investment 100,000

Average Investment = Orignal Investment / 2 50,000

x 100

=

10,800 Average return (per year return)

10,800 x 100 100,000

10.80 %

10,800 Average return (per year return)

10,800 x 100 50,000

21.60 %