Summary on excel work

finance_prof._miller_.xlsx

Exercise 1 By Bader Aljuhani

Capital Budgeting Exercise
3	0	1	2	3		4	5
Cash Flows	-38,000	-10,000	20,000	20,000	20,000	20,000	20,000
DF @ 14%	1	0.88	0.77	0.67	0.59	0.52	0.46
Present value	-38000	-8800	15400	13400	11800	10400	9200
Total Present values of cash inflows	51400
1.NPV	$13,400.00
PI	-1.3526315789
2. IRR (approx)	22.57%
MIRR SERVER: SERVER: Assuming that the reinvestment rate is 10%.	17%
3. The project should be accepted as it has positive NPV and a PI g

Mutually Exclusive Investments
Particulars	Project A	Project B	Ranking
Cash Outflow	-40000	-90000
Cash Inflows
1	16423	33466
2	16423	33466
3	16423	33466
4	16423	33466
5	16423	33466
Cumulative discount factor @ 10 %	3.7907	3.7907
Total Present value of Cash Inflows	$62,254.67	$126,859.57
1. NPV	$22,254.67	$36,859.57	Project B
IRR	30%	25%	Project A
MIRR SERVER: SERVER: assuming a reinvestment rate of 8%	19%	17%	Project A
PI	-2	-1	Project A
2
Assuming No capital rationing, Project B must be selected as it has higher NPV
3
If these are independent projects, then decision can be based upon the one which has higher NPV and PI exceeds 1

Replacement Decisions
Replacement to be done	Pv factor @ 8%	3 year alternative	4 year alternative
Cash outflow (T3/ T4)	0.79/0.735	-70000	-70000
PV factor @ 8%		0.79	0.735
Present values		-55300	-51450
Maintenance cost
Year 1 (T4)	0.735	-40000	-50000
Year 2 (T5)	0.68	-40000	-50000
Year 3 (T6)	0.63	-30000	-35000
Year 4 (T7)	0.583		-30000
Present values of maintenance cost		-75500	-110290
NPV, If replacement done at T3		($130,800.00)
NPV, If replacement done at T4			-161740
Replacement to be done after every 3 years as it has lower negative NPV

1	Yes, this investment can be evaluated
The cash inflow for year 1 exceeds the initial investment and the project can be evaluated. It can also be dropped or shut down after year 1 which will substantiall saves a lot.
2
IRR	10%
MIRR	9%
Year	0	1	2	Total
Cash Flows	-100,000	230,900	-133000
DF @ 5%		0.95	0.91
DF @15%		0.87	0.76
DF @ 18%		0.85	0.72
DF @ 25%		0.80	0.64
Present value @ 5%		219816.80	-121030.00	98786.80
Present value @ 15%		200883.00	-100548.00	100335.00
Present value @ 18%		195572.30	-95760.00	99812.30
Present value @ 25%	0	184720	-85120	99600.00
Total Present values of cash inflows	100,000
3. NPV @ 5%	1,213.2	Accepted
NPV @ 15%	-335.00	Not accepted
NPV @ 18%	187.70	Accepted
NPV @ 25%	400.00	Accepted

	Cost of New Machine	$400,000
	Operational Cost Saving	$150,000
	Life	5
	Required Rate	14%
	Marginal Tax	40%
	Years	0	1	2	3	4	5
	Saving in Cost	($400,000)	$150,000	$150,000	$150,000	$150,000	$150,000
	Dep.		80000	80000	80000	80000	80000
	EBIT		$70,000	$70,000	$70,000	$70,000	$70,000
	Tax		$28,000	$28,000	$28,000	$28,000	$28,000
	Net Profit		$42,000	$42,000	$42,000	$42,000	$42,000
	Cash Flow		$108,000	$108,000	$108,000	$108,000	$108,000
	PV	($400,000)	$94,736.84	$83,102.49	$72,896.92	$63,944.67	$56,091.82
	Cost of Old Machine	100000
	Dep. Each year	10000
	Total Five year Dep.	50000
	Book Value of Machine	50000
	market Value	40000
	Loss on Sales of Old Machine	-10000
	Tax	-4000
	Total Loss	-6000
A	NPV (Loss)	($35,227.26)
	Years	Cash Flow
	0	($404,000)
	1	$150,000
	2	$150,000
	3	$150,000
	4	$150,000
	5	$150,000
	IRR	25%
	MIRR	18%
	Project should not be accepted because NPV is negative. IRR is Positive but still company should consider the NPV. NPV refelects actuall gain and loss.
	Assumptioon	10% Reinvestment rate is assumed