Fin204

Topics: Net present value, Depreciation, Internal rate of return Pages: 8 (2195 words) Published: June 22, 2013
FIN204
Investment Analysis & Decision Making
Assignment 02
Tran Van Trung Hieu
Batch 09
E1000125

Grade
(Office Use Only)
ASSIGNMENT FOLDER

SUBJECT CODE: FIN204

STUDENT NO: E1000125

Date received
(Office Use Only)

STUDENT NAME: TRAN VAN TRUNG HIEU

PROGRAMME: Year 2, term 2

INTAKE:

Subject Name: Investment Analysis & Decision Making|
Assignment Number: 2|
Due date of assignment: 15 April 2013 Submission date: 3 June 2013|

DECLARATION: I declare that

* No part of this assignment has been copied from any other person’s work except where due acknowledgement is made in the text, and * No part of this assignment has been written for me by any other person except where such collaboration has been authorized by the lecturer concerned.

Signature………………………………………….Date………..………………………

N.B.
* The examiner has, and may exercise the right not to mark this assignment if the above declaration has not been signed. * If the above declaration is found to be false, no mark will be awarded for this assignment. QUESTION 1:

Maplewood Creations is considering the purchase of a new truck to replace an old truck that has a book value of $2,500 and a market value of $800. The annual depreciation expense on the old truck was $500. The new truck, which will cost $29,000, will reduce operating costs $9,000 per year over it's 6 year economic life. The new truck has a 5-year MACRS life and an estimated salvage value at the end of 6 years of $2,000. If Maplewood has a 40 percent marginal tax rate and a cost of capital of 12 percent, what is the NPV of the new truck? Use the Depreciation schedule listed below: (5-Year depreciation Schedule: 20%, 32%, 19%, 12%, 12%, 5%) Answer:

Year| 0| 1| 2| 3| 4| 5| 6|
Total value| 29,000| 29,000| 29,000| 29,000| 29,000| 29,000| 29,000| Depreciation schedule| -| 20%| 32%| 19%| 12%| 12%| 5%| Amount depreciation| 0| | | | | | |
Balance| 29,000| 23,300| 8,410| 4,930| 1,450| 1450| 0|

Following the MARCS life:
Book value of old machine| 2,500|
Sale proceeds| (800)|
Loss on sale| 1,700|

1. Initial cash flows
New truck($29,000)
Sale proceeds of old truck$800
Tax saving on the loss on sale of old truck $680
Net initial($27,520)

2. Operating cash flows:
| Year 1| Year 2| Year 3| Year 4| Year 5| Year 6|
Savings of reducing operating costs [1]| 9,000| 9,000| 9,000| 9,000| 9,000| 9,000| Amount deprecation [2]| 5,800| 9,280| 5,510| 3,480| 3,480| 1,450| Less: Depreciation of old machine| (500)| (500)| (500)| (500)| (500)| (500)| Increase in depreciation change[3]| (5,300)| (8,780)| (5,010)| (2,980)| (2,980)| (950)| Net increase in profit before tax [1]-[3]| 3,700| 220| 3,990| 6,020| 6,020| 8,050| Less: Tax (@ x 40%) [4]| (1,480)| (88)| (1,596)| (2,408)| (2,408)| (3,220)| Profit after tax [2]-[4]| 2,220| 132| 2,394| 3,612| 3,612| 4,830| Add: Depreciation| (5,300)| (8,780)| (5,010)| (2,980)| (2,980)| (950)| Net after tax cash flow| $7,520| $8,912| $7,404| $6,592| $6,592| $5,780|

3. Terminal cash flow (year 6):
Salvage value of new machine| 2,000|
Tax payable on the profit on sale(2,000 X 40%)| (800)|
Net cash flow| 1,200|

The formula of calculating net present value (NPV) is:
NPV= - IO, where:
FCF =the annual free cash flow in time period t (this can take on either positive or negative values) k=the required rate of return or appropriate discount rate or cost of capital IO=the initial cash outlay

n= the project's expected life
We have:
NPV = 7,5201+0.121+ 8,912(1+0.12)2+7,404(1+0.12)3+6,592(1+0.12)4+6,592(1+0.12)5+5,780(1+0.12)6+1,200(1+0.12)6 – 27,520...
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