Business Finance: NPV and Sensitivity Analysis

This article discusses the concept of Net Present Value (NPV) and Sensitivity Analysis in Business Finance. It includes a step-by-step guide on how to calculate NPV and perform sensitivity analysis with solved examples. The article also covers topics such as capital gain tax, tax shield, and non-operating cash flow. The bibliography includes references to relevant books on financial management and investment appraisal.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the Student:
Author’s Note:

2BUSINESS FINANCE
Table of Contents
Requirement 3:.................................................................................................................................3
Requirement 4:.................................................................................................................................4
Requirement 5:.................................................................................................................................5
Bibliography:...................................................................................................................................6

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Requirement 3:
a) The new building and equipment would be sold for $15,000 at the end of year 4.
b) Myer would receive $2,045 as tax shield if the building is sold at the end of year 4.
c) The capital gain tax for selling the equipment at the end of year 4 would be $384.
d) The after-tax non-operating cash flow in the terminal year would be $20,661.
Workings:
Computaion of Capital Gain Tax & Tax Shield:
Particulars Building Equipment TOTAL
Selling riceP $15,000 $4,000 $19,000
ess ook ValueL : B $21,816 $2,720 $24,536
Gain/(Loss) on Sale -$6,816 $1,280 -$5,536
Marginal a RateT x 30% 30% 30%
Capital Gan Tax/(Tax Shield) -$2,045 $384 -$1,661
After-Tax Non-operating cash flow $17,045 $3,616 $20,661

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Requirement 4:
Net Present Value:
Particulars 0 1 2 3 4
Initial Investment:
uildingB -$24,000
quipmentE -$16,000
et orking CapitalN W -$12,000
Total Initial Investment -$52,000
Operating Cash Flow:
Annual Sales $80,000 $80,000 $80,000 $80,000
Variable Manufacturing Costs -$48,000 -$48,000 -$48,000 -$48,000
i ed verhead CostF x O -$10,000 -$10,000 -$10,000 -$10,000
Depreciati on penseEx -$3,512 -$5,744 -$3,664 -$2,544
Net Profit before Tax $18,488 $16,256 $18,336 $19,456
a pensesT x Ex -$5,546 -$4,877 -$5,501 -$5,837
Net Profit after Tax $12,942 $11,379 $12,835 $13,619
Add Depreciati on: $3,512 $5,744 $3,664 $2,544
Add Recovery of orking Capital: W $12,000
Net Operating Cash Flow $16,454 $17,123 $16,499 $28,163
Non-Operating Cash Flow:
Sale of uildingB $15,000
Sale of quipmentE $4,000
Capital ain a for quipmentG T x E -$384
a Shield for oss on uildingT x- L B $2,045
After-Tax Non-Operating Cash Flow $20,661
Net Cash Flow -$52,000 $16,454 $17,123 $16,499 $48,824
Cost of Capital 12% 12% 12% 12% 12%
Discounted Cash Flow -$52,000 $14,691 $13,651 $11,744 $31,029
Net Present Value $19,114
Year
As the net present value, calculated above, is positive, the company should accept the
project.

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Requirement 5:
12% 10.8% 13.20%
$80,000 $19,114 $21,322 $17,005
$72,000 $12,310 $14,343 $10,370
$88,000 $25,917 $28,301 $23,641
Sensitivity Analysis of NPV:
Cost of Capital
Annual
Sales

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Bibliography:
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-
VERLAG BERLIN AN.