CASE STUDY 2
Application of Capital Budgeting Decision Rules
Company X is proposing the following capital budgeting project:
Total depreciable ccst
Shipping and installation: $30,000
Changes in working capital
Inventories will nse by $25,000
Accounts payable will rise by $5,000
Effect on operations
New sales: 100,000 umits/year @ $2/mit
Variable cost: 60% of sales
Life of the projec.
Economic life: 4 years
Depreciable life: MACRS 3-year class
Salvage value: $25,000
Determining Project Value
Estimate the re.evant cash flows recited to the project
Calculating annual operating cash flows (OCF)
Identifying changes in werking capital (NWC).
Calculating terminal cash flows (TCF) that incindes affer-tax saivage value
and return (reimbursement) of NWC.
After you solve the case, please, shortly answer to the following questions:
1. What is the role of NWC? How is NWC recovered in the last year?
2. Hew do we define Salvage Value? Is there always taxes on Salvage Value and
3. Should financing effects (interest. dividend) be included in cash flows? If yes. why?
4. What decision should be tacen by the management tased or your results? Which cf
the capital budgeting rules :3 most widely used?
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.