Financial Analysis: Capital Budgeting and Investment Strategies

This assignment provides a detailed financial analysis of capital budgeting, covering topics such as depreciation calculation, after-tax salvage value, and net working capital changes. It includes a net present value (NPV) analysis, internal rate of return (IRR), and profitability index assessment. The report also evaluates the impact of sunk costs and changes in networking capital on investment decisions. Furthermore, the assignment calculates depreciation tax shields, book value, and after-tax salvage value to determine operating cash flows and the overall financial viability of a project, concluding with a recommendation based on the NPV result. Desklib offers students access to similar solved assignments and past papers for academic support.

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

1FINANCE
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
References..................................................................................................................................6

2FINANCE
Question 1
1) The depreciation for the project was calculated for the equipment by using the straight line
depreciation method where the equipment initial value was divided using the straight line
method. The depreciation value was around 55,333 (200,000-34,000/3).
2) The after tax salvage value of the equipment was considered after taking the tax rate of
34% and the same has been taken into consideration. The salvage value is 34,000 and after
tax salvage value is 22,440 (34000*(1-0.34)).
3) The net change in the working capital is around zero as the initial invested working capital
is expected to be recovered in the third year of the project. Initial investment of 50,000 will
not be recovered in the form of recovery of working capital as 50,000 (Alleyne, Armstrong
and Chandler 2018).
4) The Time Zero- Cash Flow from Assets is around 250,000, which will be in the form of
purchase of equipment (200,000) and working capital investment (50,000).
5) The estimated operating cash flow that the project must generate to make NPV to zero is:
6) a) The NPV of project is -$628,460
b) IRR of Project will be the required rate of return from the project that is 15%.
c) Profitability Index is 1 as the cash inflow is equal to the cash outflow for the
company.
d) Financial Breakeven for the company can be well done with the help of operations
of the company where the company will be producing two next parks for a year, which will
be a financial breakeven position for the company.

3FINANCE
Net Present Value Analysis
Particulars Year 0 Year 1 Year 2 Year 3
Initial Investment
-
200,000
Working Capital Investment -50,000
Initial Investment
-
250,000
Depreciation -55333 -55333 -55333
Fixed Costs -16000 -16000 -16000
Variable Costs -336000 -336000 -336000
Total Costs -407333 -407333 -407333
Less: Tax Shield for expenses
138493.
3
138493.
3
138493.
3
Net Cost after tax -268840 -268840 -268840
Add: Depreciation 55333 55333 55333
Net Operating Cash Flow -213507 -213507 -213507
Salvage Value 34000
Less: Tax on Sale -11560
Net Salvage Value 22440
Net Cash Flows
-
250,000 -213,507 -213,507 -191,067
Net Present Value -628460
Question 2
1) The $5000 Spent by AAA in investigating the financial viability of the new machine will
be treated as Sunk Cost. The same will not be taken into consideration while evaluating the
financial viability or the profitability of the project (Shivaani, Jain and Yadav 2017).
2) The change in the networking capital for the company would be in the form of additional
initial inventory of $20,000 and the additional increase in the inventory by around $3,000 for
a sum of three years will be the key increase in the working capital of the company. The net
total change in the working capital of the company would be around $29,000

4FINANCE
3) The depreciation of the machine at year 2 will be around $88,900
4) Depreciation Tax Shield at the year 3 will be around $23,870.
5) The book value of the machine at the end of the third year will be $148,200 but after
considering the salvage value of the machine the equipment cost will be around $68,200,
which has been derived by (148200-80000).
6) The after tax salvage value at the end of the project at the end of year 3 will be around
$56,130 which has been derived by deducting the net book value of the asset with the
applicable tax rate of 35%. (68,200-23,870) = $56,130.
7) The operating cash flows for the project would be as follows:
Particulars Year 0 Year 1 Year 2 Year 3
Initial Investment
(2,000,0
00)
Working Capital Investment
(Inventory)
(20,0
00)
Initial Investment
(2,020,0
00)
Cash Flows 800,000 800,000 800,000
Depreciation
(666,6
00)
(889,0
00)
(296,20
0)
Increase in Inventory
(3,0
00)
(3,0
00)
(3,0
00)
Total Costs
(669,6
00)
(892,0
00)
(299,20
0)
Less: Tax Shield for expenses
234,3
60
312,2
00
104,7
20
Net Cost after tax
(435,2
40)
(579,8
00)
(194,48
0)
Add: Depreciation
666,6
00
889,0
00
296,2
00
Net Operating Cash Flow
1,031,3
60
1,109,2
00
901,7
20
Book Value 148200

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Salvage Value 80,000
Net Remaining Value 68,200
Less: Tax on Sale 23870
Net Salvage Value 56,130
Net Cash Flows -2,020,000
1,031,3
60
1,109,2
00
957,8
50
Net Present Value $337,471
The operating cash flows for the company are:
Particulars Year 0 Year 1 Year 2 Year 3
Net Operating Cash Flow
1,031,3
60
1,109,2
00
901,7
20
8) The Cash flow from Operation are as follows:
Particulars Year 0 Year 1 Year 2 Year 3
Net Cash Flows -2,020,000
1,031,3
60
1,109,2
00
957,8
50
Net Present Value $337,471
9) The project should be accepted as the net present value of the project is around $ 337,471
which states that the project would be creating wealth for the shareholders or stakeholders of
the company in the form of profitability from the project. The calculation of NPV has taken
15% as the discount rate for determining the financial viability of the business (Su et al.
2018).

6FINANCE
References
Alleyne, P., Armstrong, S. and Chandler, M., 2018. A survey of capital budgeting practices
used by firms in Barbados. Journal of Financial Reporting and Accounting, 16(4), pp.564-
584.
Shivaani, M.V., Jain, P.K. and Yadav, S.S., 2017. Perceptual Mapping of Capital Budgeting
Techniques: Empirical Evidence from Corporate Enterprises in India. Research Bulletin,
42(4), pp.106-112.
Su, S.H., Lee, H.L., Chou, J.J., Yeh, J.Y. and Thi, M.H.V., 2018. Application and effects of
capital budgeting among the manufacturing companies in Vietnam. International Journal of
Organizational Innovation (Online), 10(4), pp.111-120.