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    Chapter 8 - Baldwin Company Example

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    Chapter 8 - Baldwin Company Example

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    15 views4 pages

    Chapter 8 - Baldwin Company Example

    Uploaded by

    twipper

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 4

    Chapter 8 - Section 2

    The Baldwin Company: An Example

    Because capital budgeting requires numerous repetitive cash flows, it is an ideal application for Excel. When doing a
    should do few or no calculations manually, but rather let Excel do the calculations for you. We will begin with the Ba
    projections for the project:

    Year 1 Year 2 Year 3


    Units sold per year 5,000 8,000 12,000
    Price per unit for Year 1 $ 20.00
    Price increase per year 2%
    Inflation rate 5%
    Tax rate 21%
    Unit production cost for Year 1 $ 10.00
    Increase in unit cost per year 10%
    NWC to start project $ 10,000
    NWC for subsequent years 10%
    Depreciation rate 20.00% 32.00% 19.20%
    Cost of machine $ 100,000
    Cost of warehouse $ 150,000
    Pretax salvage value $ 30,000

    We will start off with some preliminary work, including the calculation of depreciation each year, sales price, and un

    Year 1 Year 2 Year 3


    Depreciation $ 20,000 $ 32,000 $ 19,200
    Accumulated depreciation 20,000 52,000 71,200
    Adjusted basis of machine 80,000 48,000 28,800
    Price per unit 20.00 20.40 20.81
    Sales revenue 100,000 163,200 249,696
    Cost per unit 10.00 11.00 12.10
    Operating costs 50,000 88,000 145,200

    The change in net working capital for each year is the beginning net working capital for each year minus the net wor
    change in net working capital each year is:

    Net working capital


    Beginning NWC $ 10,000 $ 10,000 $ 16,320
    End of year NWC 10,000 16,320 24,970
    NWC cash flow $ - $ (6,320) $ (8,650)

    The machine will have a salvage value at the end of the project, but we are concerned with the aftertax salvage valu
    Pretax salvage value $ 30,000
    Taxes on sale 5,090
    Aftertax salvage value $ 24,910

    Now we can calculate the pro forma income statement for each year (Table 8.1 in the textbook), which will be:

    Sales revenue $ 100,000 $ 163,200 $ 249,696


    Operating costs 50,000 88,000 145,200
    Depreciation 20,000 32,000 19,200
    Income before taxes $ 30,000 $ 43,200 $ 85,296
    Taxes at 21 percent 6,300 9,072 17,912
    Net income $ 23,700 $ 34,128 $ 67,384

    With this, the incremental cash flows each year, NPV for different interest rates, and IRR for the project are (Table 8

    Year 0 Year 1 Year 2


    Sales revenue $ 100,000 $ 163,200
    Operating costs 50,000 88,000
    Taxes 6,300 9,072
    Cash flow from operations $ 43,700 $ 66,128
    Bowling ball machine $ (100,000)
    Warehouse (150,000)
    Net working capital (10,000) - (6,320)
    Total cash flow of project $ (260,000) $ 43,700 $ 59,808

    NPV
    4% $ 155,809
    10% $ 78,533
    15% $ 28,968
    18.54% 0
    20% $ (10,682)
    al application for Excel. When doing a capital budgeting problem, as in most Excel uses, you
    ons for you. We will begin with the Baldwin Company project. We have the following

    Year 4 Year 5
    10,000 6,000

    11.52% 11.52%

    eciation each year, sales price, and unit costs:

    Year 4 Year 5
    $ 11,520 $ 11,520
    82,720 94,240
    17,280 5,760
    21.22 21.65
    212,242 129,892
    13.31 14.64
    133,100 87,846

    apital for each year minus the net working capital investment at the end of the year. So, the

    $ 24,970 $ 21,224
    21,224 -
    $ 3,745 $ 21,224

    ncerned with the aftertax salvage value, which is:


    1 in the textbook), which will be:

    $ 212,242 $ 129,892
    133,100 87,846
    11,520 11,520
    $ 67,622 $ 30,526
    14,201 6,410
    $ 53,421 $ 24,115

    es, and IRR for the project are (Table 8.4 in the textbook):

    Year 3 Year 4 Year 5


    $ 249,696 $ 212,242 $ 129,892
    145,200 133,100 87,846
    17,912 14,201 6,410
    $ 86,584 $ 64,941 $ 35,635
    24,910
    150,000
    (8,650) 3,745 21,224
    $ 77,934 $ 68,687 $ 231,769

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