# Corporate Finance Ross Mini Case 8Ed

**Topics:**Weighted average cost of capital, Investment, Market value

**Pages:**22 (2562 words)

**Published:**April 24, 2014

CHAPTER 10

MINOR INTERNATIONAL

PART 1

a. The software consultant is a sunk cost. The consultant is being hired to assist with the decision as to whether to invest in either project or not. This cost will be incurred before the decision for either project is made and is not incremental to either project. Consequently, it is considered a sunk cost.

In addition, the inter-company charge for the computer time is not an incremental cash flow to the firm. Consequently, it is really an internal allocation and should not be considered in the valuation of either project.

Alternative A calculations:

Initial

0

1

2

3

4

5

Investment

-185,000

Cost savings

82,000

82,000

64,000

53,000

37,000

Tax @ 35%

28,700

28,700

22,400

18,550

12,950

After tax savings

53,300

53,300

41,600

34,450

24,050

PV @ 15%

-185,000

46,347.83

40,302.46

27,352.68

19,696.90

11,957.10

Tax rate

k rate

CCA rate

Cost

Salvage

35.00%

15.00%

30.00%

$185,000

$0

PVCCATS =

40,351.45

NPV =

$1,008.42

Assuming that assets will remain in this class at the end of the project and continue to be claimed for CCA purposes, the PVCCATS is equal to:

Also, we assume that there are no working capital investments required or salvage values at the end of the project. The NPV is found from adding up the initial cost, the PV of after tax cash flows and the PVCCATS:

NPV = -185,000 + 46,347.83 + 40,302.46+ 27,352.68+ 19,696.90+ 11,957.10+ 40,351.45= $1,008.42

Therefore, Alternative A has a positive NPV of $1,008.42

Alternative B calculations:

Initial

0

1

2

3

4

5

Investment

-320,000

Cost savings

112,000

124,000

101,000

93,000

56,000

Tax @ 35%

39,200

43,400

35,350

32,550

19,600

After tax savings

72,800

80,600

65,650

60,450

36,400

PV @ 15%

-320,000

63,304.35

60,945.18

43,165.94

34,562.48

18,907.23

Tax rate

k rate

CCA rate

Cost

Salvage

35.00%

15.00%

30.00%

$320,000

$0

PVCCATS =

69,797.10

NPV = -

$30,127.72

Assuming that assets will remain in this class at the end of the project and continue to be claimed for CCA purposes, the PVCCATS is equal to:

Also, we assume that there are no working capital investments required or salvage values at the end of the project.

NPV = -320,000 + 63,304.35+ 60,945.18+ 43,165.94+ 34,562.48+ 18,907.23+ 69,797.10

= -$30,127.72

Alternative B has a NPV of -$30,127.72.

Since Alternative A is the only project with a positive NPV, Alternative A should be recommended.

b. With three years of cash flows only, the NPV for each project would be as follows:

Alternative A:

NPV = -185,000 + 46,347.83 + 40,302.46 + 27,352.68 + 40,351.45 = $30,645.58 Alternative B:

NPV = -320,000 + 63,304.35 + 60,945.18 + 43,165.94 + 69,797.10 = -$82,787.43

Again, since Alternative A is the only project with a positive NPV, Alternative A should be recommended.

c. The NPV for Alternative B is large and negative. The addition of salvage value at the levels indicated will not change this fact. Consequently, only the NPV for Alternative A has been calculated based on salvage at the end of years 3, 4 and 5 as follows:

Year 3

Year 4

Year 5

After- tax salvage value

$50,000

$35,000

$0

PV of salvage

32,875

20,011.36

NPV before salvage

As in part b)

-30,645.58

See Note ** below

-15,948.68

As in part a)

1,008.42

Total NPV including salvage

2,230.23

4,062.68

1,008.42

** NPV before salvage after 4 years =

= -185,000 + 46,347.83 + 40,302.46 + 22,352.68 + 19,696.90 + 40,351.45 = $-15,948.68

Based on the above calculations, the company’s best alternative, with the...

Please join StudyMode to read the full document