Capital Budgeting Project A

Initial Cost

0
(499,248)

Per Unit Labor Savings

Per Unit Savings
Units
Annual Labor Savings

$0.82
$0.85
$0.88
$0.91
$0.94
$0.97
$1.00
$1.03
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
82,000 $ 85,000 $ 88,000 $ 91,000 $ 94,000 $ 97,000 $ 100,000 $ 103,000

Overhead Savings (add expenses)

Reduction in Expenses
Depreciation

$
$
$

13,320
95,320
62,406

$ 13,320
$ 98,320
$ 62,406

$ 13,320
$ 101,320
$ 62,406

$ 13,320
$ 104,320
$ 62,406

$ 13,320
$ 107,320
$ 62,406

$ 13,320
$ 110,320
$ 62,406

$ 13,320
$ 113,320
$ 62,406

$ 13,320
$ 116,320
$ 62,406

32,914

$ 35,914

$ 38,914

$ 41,914

$ 44,914

$ 47,914

$ 50,914

$ 53,914

$
$
$
$

3,291
29,623
62,406
92,029

$ 3,591
$ 32,323
$ 62,406
$ 94,729

$ 3,891
$ 35,023
$ 62,406
$ 97,429

$ 4,191
$ 37,723
$ 62,406
$ 100,129

$ 4,491
$ 40,423
$ 62,406
$ 102,829

$ 4,791
$ 43,123
$ 62,406
$ 105,529

$ 5,091
$ 45,823
$ 62,406
$ 108,229

$ 5,391
$ 48,523
$ 62,406
$ 110,929

(499,248) $
11.83%
7.56%

92,029

$ 94,729

$ 97,429

$ 100,129

$ 102,829

$ 105,529

$ 108,229

$ 110,929

$
$

(499,248) $
87,798

85,561

$ 81,882

$ 78,297

$ 74,812

$ 71,430

$ 68,154

$ 64,985

$ 61,925

Increase (decrease) in Operating

Income
Increase (decrease) in Income
Taxes @ 10%
Increase (decrease) in Net Income
Add: Depreciation
Increased Operating Cash Flow
CASH FLOW
Internal Rate of Return (IRR)
WACC- Cost of Capital
Internal Rate of Return
PV of Cash Flows
Net Present Value
Bold: No Input Necessary

Capital Budgeting Project B

Capacity: 120,000 Units

Initial Cost

0
$ (507,600)

Per Unit Labor Savings

Per Unit Savings
Units
Annual Labor Savings

$0.86
$0.85
$0.84
$0.83
$0.82
$0.81
$0.80
$0.79
$0.78
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
$ 103,200 $ 102,000 $ 100,800 $ 99,600 $ 98,400 $ 97,200 $ 96,000 $ 94,800 $ 93,600

Overhead Savings (add. Expenses)

Reduction in Expenses
Depreciation

$ (8,000) $ (8,000) $ (8,000) $ (8,000) $ (8,000) $ (8,000) $ (8,000) $ (8,000) $ (8,000)

$ 95,200 $ 94,000 $ 92,800 $ 91,600 $ 90,400 $ 89,200 $ 88,000 $ 86,800 $ 85,600
$ 42,300 $ 63,450 $ 63,450 $ 63,450 $ 63,450 $ 63,450 $ 63,450 $ 63,450 $ 63,450

Increase (decrease) in Operating

Income
Increase (decrease) in Income
Taxes @ 40%
Increase (decrease) in Net Income
Add: Depreciation
Increased Operating Cash Flow
CASH FLOW
Internal Rate of Return (IRR)
WACC- Cost of Capital
Internal Rate of Return
PV of Cash Flows
Net Present Value
Bold: No Input Necessary

$ 52,900

$ 30,550

$ 29,350

$ 28,150

$ 26,950

$ 25,750

$ 24,550

$ 23,350

$ 22,150

$
$
$
$

$
$
$
$

$
$
$
$

$
$
$
$

$
$
$
$

$
$
$
$

10,300
15,450
63,450
78,900

$ 9,820
$ 14,730
$ 63,450
$ 78,180

$ 9,340
$ 14,010
$ 63,450
$ 77,460

$ 8,860
$ 13,290
$ 63,450
$ 76,740

21,160
31,740
42,300
74,040

12,220
18,330
63,450
81,780

11,740
17,610
63,450
81,060

11,260
16,890
63,450
80,340

10,780
16,170
63,450
79,620

$ (507,600) $ 74,040
11.01%
7.56%

$ 81,780

$ 81,060

$ 80,340

$ 79,620

$ 78,900

$ 78,180

$ 77,460

$ 76,740

$ (507,600) $ 68,837
$ 94,945

$ 70,689

$ 65,143

$ 60,027

$ 55,308

$ 50,956

$ 46,943

$ 43,242

$ 39,829

10

11

12

$0.77
$0.76
$0.75
120,000 120,000 120,000
$ 92,400 $ 91,200 $ 90,000
$ (8,000) $ (8,000) $ (8,000)
$ 84,400 $ 83,200 $ 82,000
$ 63,450 $ 63,450 $ 63,450

$ 20,950

$ 19,750

$ 18,550

$ 8,380
$ 12,570
$ 63,450
$ 76,020

$
$
$
$

$
$
$
$

$ 76,020

$ 75,300

$ 74,580

$ 36,683

$ 33,782

$ 31,107

7,900
11,850
63,450
75,300

7,420
11,130
63,450
74,580

Cost of Capital or Weighted Average Cost of Capital (WACC)

Before-Tax Cost of Bonds
Tax Rate
After-Tax Cost of Debt

1.40%
40.00%
0.84%

Equity
Cost of (Common Stock) Equity

Weighted Average Cost of Capital (WACC)

Bonds/LT Debt
(Common Stock) Equity
Total LT financing*
* Intermediate and ST debt excluded for simplification
WACC*
* Keep in mind this is quarterly
Approximate annual WACC-- how it is normally viewed)

9.00%

$
$
$

Percentage of Long
Term Debt
Financing and
Equity
2,400,000
17.66%
11,190,574
82.34%
13,590,574
100.00%

7.56%
30.24%