NPV PAYBACK AND CAPITAL BUDGETING
janejanie
205_case_project_2.docxRDC DSB – 205 Winter 2017 –
In your teams work together on analysing the information contained in these documents – You will be given the Examination Questions separately at a later date.
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1) Assumptions |
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Company #1 |
Company #2 |
Company #3 |
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Interest Rate (No principal Pmt) |
5% |
5% |
5% |
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Dividend Rate |
4% |
4% |
4% |
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Tax Rate |
25% |
25% |
25% |
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2018 Tax Status |
taxable |
taxable |
non-taxable |
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Estimated 2018 Operating Cash Flow from 2017 |
500 |
2,600 |
350 |
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Maximum - Debt/Total SHE |
25% |
25% |
25% |
If you go over you risk default |
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DD&A Rate |
10% |
10% |
10% |
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Ignore 2018 tax pools |
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Companies are unable to issue shares in 2018 |
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FMV is selling price and book value. |
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Dividends are all cash |
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Assume no Working capital |
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2) Hints!!! |
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First figure out the cash you will have to spend in 2018 |
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Pick your projects to buy or sell |
3) Investment Project Details
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Project #1 |
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2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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Capital Required |
2,000 |
4,000 |
8,000 |
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Cash Flow |
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2,000 |
3,000 |
10,000 |
9,000 |
8,100 |
7,290 |
6,561 |
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(2,000) |
(4,000) |
(8,000) |
2,000 |
3,000 |
10,000 |
9,000 |
8,100 |
7,290 |
6,561 |
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Fair Market Value FMV) |
3,000 |
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Project #2 |
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2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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Capital Required |
1,000 |
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Cash Flow |
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300 |
270 |
243 |
219 |
197 |
177 |
159 |
143 |
129 |
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(1,000) |
300 |
270 |
243 |
219 |
197 |
177 |
159 |
143 |
129 |
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Fair Market Value FMV) |
50 |
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Project #3 |
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2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
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Capital Required |
2,500 |
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Cash Flow |
500 |
1,000 |
900 |
810 |
729 |
656 |
590 |
531 |
478 |
430 |
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(2,000) |
1,000 |
900 |
810 |
729 |
656 |
590 |
531 |
478 |
430 |
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Fair Market Value FMV) |
750 |
4) Financial Statements of the 3 Companies A, B and C
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2017 Financial Statements |
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Company #1 |
Company #2 |
Company #3 |
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Balance Sheet |
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Cash |
25 |
25 |
1 |
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Other assets |
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9,000 |
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Net - Property Plant and Equipment |
10,980 |
15,975 |
25,999 |
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Total Assets |
11,005 |
25,000 |
26,000 |
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Long Term Debt |
1,000 |
2,000 |
5,000 |
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Deferred Tax Liability |
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1,000 |
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Share Capital |
5 |
20,000 |
25,000 |
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Retained Earnings |
10,000 |
3,000 |
(5,000) |
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Total Share Holder Equity |
10,005 |
23,000 |
20,000 |
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Total Liabilities and SHE |
11,005 |
25,000 |
26,000 |
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Income Statement |
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Operational Net Back (EBITDA) |
2,500 |
3,000 |
300 |
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Interest |
50 |
100 |
250 |
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DD&A |
1,098 |
1,598 |
2,600 |
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Earnings Before Tax (EBIT) |
1,352 |
1,303 |
(2,550) |
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Taxes |
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Current |
338 |
326 |
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Deferred |
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(637) |
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338 |
326 |
(637) |
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Net Income |
1,014 |
977 |
(1,912) |
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Cash Flow Statement |
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Operating Activities |
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Net Income (Loss) |
1,014 |
977 |
(1,912) |
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DD&A |
1,098 |
1,598 |
2,600 |
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Taxes |
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(637) |
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2,112 |
2,574 |
50 |
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Investing Activities |
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Capital Expenditures |
(5,000) |
(5,000) |
(500) |
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Property Dispositions |
- |
- |
1,451 |
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(5,000) |
(5,000) |
951 |
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Financing Activities |
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Increase (Decrease) Long Term Debt |
2,963 |
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Issue of Equity |
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3,251 |
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Dividends |
(0) |
(800) |
(1,000) |
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2,963 |
2,451 |
(1,000) |
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Change in Cash |
75 |
25 |
1 |
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Cash, beginning of year |
- |
- |
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Cash, end of year |
75 |
25 |
1 |
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RDC DSB 205 Winter 2017 -
From the information provided you are to:
1) Calculate the DPI, ROR, Payback and NPV for each project 1, 2 and 3.
2) Rank the three projects from best to worst using DPI, ROR, Payback and NPV (from the perspective of each Company A, B and C) irrespective of the company you are given.
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Project no |
Company A |
Company B |
Company C |
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Project 1 |
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Project 2 |
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Project 3 |
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3) Explain your reasoning in (2) above - giving more details for your designated company
4) What discount factor have you used and why?
5) Recommend which projects to execute or sell commencing in 2018 (hint - first calculate cash available).
