Business Finance Project: Capital Budgeting and NPV Analysis

This project analyzes a capital budgeting decision for Myer Inc., evaluating the potential investment in a new plant. The solution includes detailed calculations for after-tax non-operating cash flows, capital gain taxes, and tax shields. It presents a comprehensive net present value (NPV) analysis, considering initial investment, operating cash flows, and non-operating cash flows, demonstrating how the project's profitability is determined. The project also incorporates sensitivity analysis to assess how changes in key variables, such as annual sales and the cost of capital, impact the NPV. The analysis concludes with a recommendation on whether the company should accept the project based on the positive NPV, providing a practical application of financial management principles.

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.