Application in Capital Budgeting

Running head: FINANCE 1
Application in Capital Budgeting

FINANCE 2
Table of Contents
TASK 2a..........................................................................................................................................3
Relevant Assumptions.....................................................................................................................3
Treatment of depreciation................................................................................................................3
Treatment of Working Capital.........................................................................................................4
Calculation of initial capital outlay..................................................................................................4
Calculation of NPV..........................................................................................................................4
Conclusion.......................................................................................................................................5
Task 2B............................................................................................................................................5
References........................................................................................................................................6

FINANCE 3
TASK 2a
Relevant Assumptions
There are certain assumptions which have been undertaken to arrive at the calculations and
help the company to take the decisions.
1. The costs such as the developmental costs, testing costs and initial marketing costs are
included in the initial capital outlay as the company is forming the drug, and these
expenses accounts for the major expenses that require for the formation of each and every
drug
2. The next assumption is that depreciation is added back (Hopkinson, 2017).
3. The treatment of working capital is shown in the yearly cash flows.
Treatment of depreciation
The depreciation is added back to the profits to arrive at the annual cash flows. This is the
case as depreciation is a non-cash expense and yet it is accounted for the purpose of the tax.
Since the amount affects the amount of the taxes therefore it is first deducted from the profits and
at last added back to the profits to arrive at the annual cash flows. For the table below it can be
analyzed that the depreciation amount is less as compared to the situation where the depreciation
is not charged (Johnson & Pfeiffer, 2016).
With Depreciation Without Depreciation
EBIDTA 10900000 10900000
Depreciation 780000 0
PBT 10120000 10900000
Tax @ 30% 3036000 327000
PAT 7084000 7630000