Finance Solution

CASE-11M Student Version 10/31/07

CHICAGO VALVE COMPANY

Capital Budgeting Decision Methods

This case is designed as an introduction to capital budgeting methods.

NPV, IRR, MIRR, PI, and Payback are included in the analysis.

The model develops the project's cash flows on the basis of input cost

and savings data, then calculates the above decision criteria. Note

that this model was constructed specifically for this case, and hence

project life and depreciation allowances are fixed. The spreadsheet

sheet NPV-PROF contains a graph of the NPV profiles and the sheet

MULTIPLE contains a graph of the multiple IRR project.

If you are using the student version of the model, the following cells

have been blanked out: C40:C41,B58:C65, D57:D65, B67:B72, and F70:F72.

Before using the model, it is necessary to fill in the empty cells with the

appropriate formulas. Once this is done, the model is ready for use.

= = = = = = =

INPUT DATA: KEY OUTPUT:

New system:

Delivered cost $200,000 NPV $36,955

Installation $12,500 IRR 16.2%

Salvage value $0 MIRR -13.2%

Annual savings $60,000 Payback 3.21

PI 0.17

Old system:

Current book value $0

Current market value $0

Removal cost $0

Other data:

Cost of capital 11.0%

Tax rate 40.0%

= = = = = = =

MODEL-GENERATED DATA:

Cash flows at t=0: End-of-project cash flows:

Cost of new system $200,000 Salvage value ----> $0

Installation 12,500 SV tax 0

-------- ----------

Total cost $212,500 Total $0

--------

Proceeds from old equip $0 Depreciation information:

Tax on proceeds 0

Removal cost (AT) 0 Depreciable basis: ($212,500)

--------

Net cash flow, old $0

--------

Net invest. outlay $212,500

========

Annual cash flows:

Deprn A.T. Cost

Year Tax saving Saving Net CF Cum CF

---- -------- ------------ ------ ------

0 ($212,500) ($212,500)

1 $17,000 $36,000 $53,000 (159,500)

2 27,200 $36,000 $63,200 (96,300)

3 16,150 $36,000 $52,150 (44,150)

4 10,200 $36,000 $46,200 2,050

5 9,350 $36,000 $45,350 47,400

6 5,100 $36,000 $41,100 88,500

7 0 $36,000 $36,000 124,500

8 0 $36,000 $36,000 160,500

NPV: $36,955 Analysis of Short-Term Project:

IRR: 16.2% Cost ($120,000)

TV: Year 1 CF $150,000

MIRR: -13.2% NPV $15,135

Payback: 3.2 IRR 25.0%

PI: 0.17 MIRR -25.0%

Data Table for effect of cost savings:

Savings NPV IRR MIRR Payback PI

36955.09982 0.16202278 -0.132471185 3.205779539 0.173906352

40,000 (24,798) 7.2% 9.3% 5.43 0.88

50,000 6,078 11.9% 11.4% 4.56 1.03

60,000 36,955 16.2% 13.2% 3.96 1.17

70,000 67,832 20.2% 14.9% 3.50 1.32

80,000 98,709 24.1% 16.4% 3.14 1.46

Data Table for effect of cost of capital: NPV of

-------> short-term

Cap Cost NPV IRR MIRR Payback PI project

36955.09982 0.16202278 -0.132471185 3.205779539 0.173906352 15135.13514