Corporate Finance Coursework
Essay by tyna • January 20, 2017 • Coursework • 2,456 Words (10 Pages) • 1,297 Views
Revenue: $50million/year
Production cost: $47.50million/year
Discount rate: 15% or 0.15 ≈ 1.15
Option A:
Replacement = $800,000 per machine (not involve production cost)
Table 1
Year | Cash Flow Out ($'000) | Cash Flow In ($'000) | Cash Flow Net ($'000) |
0 | $8m | 0 | -$8m |
1 | $47.5m | $50m | $2.5m |
2 | $47.5m | $50m | $2.5m |
3 | $47.5m | $50m | $2.5m |
4 | $47.5m | $50m | $2.5m |
5 | $47.5m | $50m | $2.5m |
6 | $47.5m | $50m | $2.5m |
7 | $47.5m | $50m | $2.5m |
Total | $340.5m | $350m | $9.5m |
NPV = -COST + PV
PV = [pic 1]
=[pic 3][pic 2]
= 2.5 (4.1604)
= $10.401million
NPV = -8m + 10.401m
= $2.401m
Payback period = 3years + [pic 4]
= 3.2years
Discounted payback period
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
-$8m | $2.5m | $2.5m | $2.5m | $2.5m | $2.5m | $2.5m | $2.5m | |
-$8m | 2.5/1.15 | 2.5/1.152 | 2.5/1.153 | 2.5/1.154 | 2.5/1.155 | 2.5/1.156 | 2.5/1.157 | |
$2.17m | $1.89m | $1.64m | $1.43m | $1.24m | $1.08m | $0.94m |
Discounted Payback Period = 4years +()[pic 5]
= 4.7years
Internal rate of returns = -COST + PV
NPV = 0
IRR = -8 + 2.5/(1+R) + 2.5/(1+R)2 +..... + 2.5/(1+R)7
8 = 2.5 (N = 7, R = ?)
8/2.5 = (N=7, R=?)
3.2 = (N =7, R= 0.24 or 0.25)
Annuity Factor should be between 3.2423 (24%) or 3.1611 (25%)
NPV of 24% = -8 + [2.5(3.2423)]
= 0.10575 ≈ $105,750K
NPV of 25% = -8 + [2.5(3.1611)]
= -0.09725 ≈ -$97.25K
[pic 6]
So IRR = 24% + [pic 7]
=24% + [pic 8]
= 24% + 0.5209
= 24.5209% ≈ 24.52%
1a) As per above Table 1
1b) NPV for option A = $2.401m, Payback Periods for option A = 3.2years, IRR for option A = 24.52%
Revenue = $50million
Production cost = $47.5million/year - $0.5million/year(saving in material and operator cost)
= $47million
Buy 10 centrally controlled stampers = $1.25million/each x 10
= $12.5million
Option B
Table 2
Year | Cash Flow Out ($'M) | Cash Flow In ($'M) | Net Cash Flow($'M) |
0 | $12.5m | 0 | -$12.5m |
1 | $47m | $50m | $3m |
2 | $47m | $50m | $3m |
3 | $47m | $50m | $3m |
4 | $47m | $50m | $3m |
5 | $47m | $50m | $3m |
6 | $47m | $50m | $3m |
7 | $47m | $50m | $3m |
8 | $47m | $50m | $3m |
9 | $47m | $50m | $3m |
10 | $47m | $50m | $3m |
Total | $482.5m | $500m | $7.5m |
NPV = -COST + PV
PV = [pic 9]
=[pic 11][pic 10]
= 3 (5.0188)
= $15.0564million
NPV = -12.5 + 15.564
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