NPV PAYBACK AND CAPITAL BUDGETING
RDC DSB – 205 Winter 2017 –
In your teams work together on analysing the information contained in these documents – You will be given the Examination Questions separately at a later date.
| ||||||
| Company #1 | Company #2 | Company #3 | ||||
| Interest Rate (No principal Pmt) | 5% | 5% | 5% | |||
| Dividend Rate | 4% | 4% | 4% | |||
| Tax Rate | 25% | 25% | 25% | |||
| 2018 Tax Status | taxable | taxable | non-taxable | |||
| Estimated 2018 Operating Cash Flow from 2017 | 500 | 2,600 | 350 | |||
| Maximum - Debt/Total SHE | 25% | 25% | 25% | If you go over you risk default | ||
| DD&A Rate | 10% | 10% | 10% | |||
| Ignore 2018 tax pools | ||||||
| Companies are unable to issue shares in 2018 | ||||||
| FMV is selling price and book value. | ||||||
| Dividends are all cash | ||||||
| Assume no Working capital | ||||||
| ||
| First figure out the cash you will have to spend in 2018 | ||
| Pick your projects to buy or sell | ||
Investment Project Details
| Project #1 | ||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |
| Capital Required | 2,000 | 4,000 | 8,000 | |||||||
| Cash Flow |
|
|
| 2,000 | 3,000 | 10,000 | 9,000 | 8,100 | 7,290 | 6,561 |
| (2,000) | (4,000) | (8,000) | 2,000 | 3,000 | 10,000 | 9,000 | 8,100 | 7,290 | 6,561 | |
| Fair Market Value FMV) | 3,000 | |||||||||
| Project #2 | ||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |
| Capital Required | 1,000 | |||||||||
| Cash Flow |
| 300 | 270 | 243 | 219 | 197 | 177 | 159 | 143 | 129 |
| (1,000) | 300 | 270 | 243 | 219 | 197 | 177 | 159 | 143 | 129 | |
| Fair Market Value FMV) | 50 | |||||||||
| Project #3 | ||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |
| Capital Required | 2,500 | |||||||||
| Cash Flow | 500 | 1,000 | 900 | 810 | 729 | 656 | 590 | 531 | 478 | 430 |
| (2,000) | 1,000 | 900 | 810 | 729 | 656 | 590 | 531 | 478 | 430 | |
| Fair Market Value FMV) | 750 | |||||||||
Financial Statements of the 3 Companies A, B and C
| 2017 Financial Statements | |||
| Company #1 | Company #2 | Company #3 | |
| Balance Sheet | |||
| Cash | 25 | 25 | 1 |
| Other assets | 9,000 | ||
| Net - Property Plant and Equipment | 10,980 | 15,975 | 25,999 |
| Total Assets | 11,005 | 25,000 | 26,000 |
| Long Term Debt | 1,000 | 2,000 | 5,000 |
| Deferred Tax Liability | 1,000 | ||
| Share Capital | 5 | 20,000 | 25,000 |
| Retained Earnings | 10,000 | 3,000 | (5,000) |
| Total Share Holder Equity | 10,005 | 23,000 | 20,000 |
| Total Liabilities and SHE | 11,005 | 25,000 | 26,000 |
| Income Statement | |||
| Operational Net Back (EBITDA) | 2,500 | 3,000 | 300 |
| Interest | 50 | 100 | 250 |
| DD&A | 1,098 | 1,598 | 2,600 |
| Earnings Before Tax (EBIT) | 1,352 | 1,303 | (2,550) |
| Taxes | |||
| Current | 338 | 326 | |
| Deferred |
|
| (637) |
| 338 | 326 | (637) | |
| Net Income | 1,014 | 977 | (1,912) |
| Cash Flow Statement | |||
| Operating Activities | |||
| Net Income (Loss) | 1,014 | 977 | (1,912) |
| DD&A | 1,098 | 1,598 | 2,600 |
| Taxes |
|
| (637) |
| 2,112 | 2,574 | 50 | |
| Investing Activities | |||
| Capital Expenditures | (5,000) | (5,000) | (500) |
| Property Dispositions | - | - | 1,451 |
| (5,000) | (5,000) | 951 | |
| Financing Activities | |||
| Increase (Decrease) Long Term Debt | 2,963 | ||
| Issue of Equity | 3,251 | ||
| Dividends | (0) | (800) | (1,000) |
| 2,963 | 2,451 | (1,000) | |
| Change in Cash | 75 | 25 | 1 |
| Cash, beginning of year | - | - | - |
| Cash, end of year | 75 | 25 | 1 |
RDC DSB 205 Winter 2017 -
From the information provided you are to:
1) Calculate the DPI, ROR, Payback and NPV for each project 1, 2 and 3.
2) Rank the three projects from best to worst using DPI, ROR, Payback and NPV (from the perspective of each Company A, B and C) irrespective of the company you are given.
| Project no | Company A | Company B | Company C |
| Project 1 | |||
| Project 2 | |||
| Project 3 |
3) Explain your reasoning in (2) above - giving more details for your designated company
4) What discount factor have you used and why?
5) Recommend which projects to execute or sell commencing in 2018 (hint - first calculate cash available).
