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Milestone Three: Capital Budgeting Data (fill in YELLOW cells) WACC 9% Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @25% WACC: use 9% (UPS WACC was about 9.43%) Cash Flow (which in this case are Sales Revenues) are as follows: CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,000 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 АССЕРТ REJECT Initial Outlay CF1 CF2 CF3 CF4 CF5 $65,000,000 $55,000 $25,500,000 13,000,000 (12,445.000) Cash Flows (Sales) $50,000 $45.000 $65,500 $25,000 Operating Costs (excluding Depreciation) Depreciation Rate of 20% Operating Income (EBIT) $25,500,000 $25,500,000 $25,500,000 $25,500,000 13,000,000 (12,434,500) (3,108,625) 13,000,000 13.000,000 13,000,000 (12,450,000) (12,455,000) (12,475,000) (3,112,500) (9,337,500) Income Tax (Rate 25%) (3,113,750) (9,341,250) (13,000,000) (3,111,250) (3,118,750) After-Tax EBIT (9.325.875) (9,333,750) (9,356,250) + Depreciation Cash Flows (13.000.000) (13,000,000) (22,337,500) (13,000,000) (13,000,000) $65,000,000 (22,341,250) (22,325,875) (22,333,750) (22,356,250) Select from drop CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 down below: NPV ($21,888,794.38) REJECT IRR 21% REJECT WACC- why do we use WACC rate for new projects? If the project doesn't earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to invest money ("lose" it till they recover it via sales) in order to gain future benefit.

Milestone Three: Capital Budgeting Data (fill in YELLOW cells) WACC 9% Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @25% WACC: use 9% (UPS WACC was about 9.43%) Cash Flow (which in this case are Sales Revenues) are as follows: CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,000 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 АССЕРТ REJECT Initial Outlay CF1 CF2 CF3 CF4 CF5 $65,000,000 $55,000 $25,500,000 13,000,000 (12,445.000) Cash Flows (Sales) $50,000 $45.000 $65,500 $25,000 Operating Costs (excluding Depreciation) Depreciation Rate of 20% Operating Income (EBIT) $25,500,000 $25,500,000 $25,500,000 $25,500,000 13,000,000 (12,434,500) (3,108,625) 13,000,000 13.000,000 13,000,000 (12,450,000) (12,455,000) (12,475,000) (3,112,500) (9,337,500) Income Tax (Rate 25%) (3,113,750) (9,341,250) (13,000,000) (3,111,250) (3,118,750) After-Tax EBIT (9.325.875) (9,333,750) (9,356,250) + Depreciation Cash Flows (13.000.000) (13,000,000) (22,337,500) (13,000,000) (13,000,000) $65,000,000 (22,341,250) (22,325,875) (22,333,750) (22,356,250) Select from drop CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 down below: NPV ($21,888,794.38) REJECT IRR 21% REJECT WACC- why do we use WACC rate for new projects? If the project doesn't earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to invest money ("lose" it till they recover it via sales) in order to gain future benefit.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Are all values in yellow entered correctly? Is the intial outlay supposed to be negative or positive? Assuming NPV is negative and IRR is 21% v. that tax rates, it is correct that the project would be a reject due to NPV & IRR?

Milestone Three: Capital Budgeting Data (fill in YELLOW cells) WACC 9% Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @25% WACC: use 9% (UPS WACC was about 9.43%) Cash Flow (which in this case are Sales Revenues) are as follows: CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,000 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 АССЕРТ REJECT Initial Outlay CF1 CF2 CF3 CF4 CF5 $65,000,000 $55,000 $25,500,000 13,000,000 (12,445.000) Cash Flows (Sales) $50,000 $45.000 $65,500 $25,000 Operating Costs (excluding Depreciation) Depreciation Rate of 20% Operating Income (EBIT) $25,500,000 $25,500,000 $25,500,000 $25,500,000 13,000,000 (12,434,500) (3,108,625) 13,000,000 13.000,000 13,000,000 (12,450,000) (12,455,000) (12,475,000) (3,112,500) (9,337,500) Income Tax (Rate 25%) (3,113,750) (9,341,250) (13,000,000) (3,111,250) (3,118,750) After-Tax EBIT (9.325.875) (9,333,750) (9,356,250) + Depreciation Cash Flows (13.000.000) (13,000,000) (22,337,500) (13,000,000) (13,000,000) $65,000,000 (22,341,250) (22,325,875) (22,333,750) (22,356,250) Select from drop CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 down below: NPV ($21,888,794.38) REJECT IRR 21% REJECT WACC- why do we use WACC rate for new projects? If the project doesn't earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to invest money ("lose" it till they recover it via sales) in order to gain future benefit.
Transcribed Image Text:Milestone Three: Capital Budgeting Data (fill in YELLOW cells) WACC 9% Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @25% WACC: use 9% (UPS WACC was about 9.43%) Cash Flow (which in this case are Sales Revenues) are as follows: CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,000 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 АССЕРТ REJECT Initial Outlay CF1 CF2 CF3 CF4 CF5 $65,000,000 $55,000 $25,500,000 13,000,000 (12,445.000) Cash Flows (Sales) $50,000 $45.000 $65,500 $25,000 Operating Costs (excluding Depreciation) Depreciation Rate of 20% Operating Income (EBIT) $25,500,000 $25,500,000 $25,500,000 $25,500,000 13,000,000 (12,434,500) (3,108,625) 13,000,000 13.000,000 13,000,000 (12,450,000) (12,455,000) (12,475,000) (3,112,500) (9,337,500) Income Tax (Rate 25%) (3,113,750) (9,341,250) (13,000,000) (3,111,250) (3,118,750) After-Tax EBIT (9.325.875) (9,333,750) (9,356,250) + Depreciation Cash Flows (13.000.000) (13,000,000) (22,337,500) (13,000,000) (13,000,000) $65,000,000 (22,341,250) (22,325,875) (22,333,750) (22,356,250) Select from drop CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 down below: NPV ($21,888,794.38) REJECT IRR 21% REJECT WACC- why do we use WACC rate for new projects? If the project doesn't earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to invest money ("lose" it till they recover it via sales) in order to gain future benefit.
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