Results 1 to 6 of 6

Thread: Any good at finance? I'm not so I need you're help on this (Cashflow estimation)

  1. #1
    New Member
    Join Date
    Apr 2012
    Location
    Toronto Canada
    Posts
    3

    Any good at finance? I'm not so I need you're help on this (Cashflow estimation)

    Hey, hopefully there are some smart people out there who have a better understanding of this than I do.

    There's a question regarding cashflow estimation and capital budgeting that is a bit beyond what I read in the textbook. give it a crack? here it is:

    QUESTION 2: Wing Yin Tsui, CEO of Lian Huang & Wong Bin Dean Hwang Manufacturing Limited is considering a four year project. The project requires an initial investment of $10,000,000 to buy new equipment. The equipment will be depreciated straight line to zero over the projectís life. The company believes it can generate $5,000,000 in pretax revenues in year 1. Revenues will increase at 20% per year. Total pretax operating cost would be 40% of the pretax revenues. Net working capital will be 20% of the pretax revenue for the year. Net working capital will be fully recovered at the end of the project. Revenues and operating costs will occur at the end of the year and investment in net working capital will be made at the beginning of the year. The tax rate is 40% and the discount rate is 12%.


    1) What is the NPV of the project?


    2) Now compute the projectís NPV assuming the project is abandoned after one year. The equipment will be salvaged for $8,000,000. Any gain or loss due to selling the equipment for other than the book value will create taxable gain/loss.

    ------
    You're a finance master if you can do this!

  2. #2
    Junior Member Unknown008's Avatar
    Join Date
    Sep 2011
    Location
    Mauritius
    Posts
    148
    1. I gave this a try. I haven't done much on NPVs and the working capital is what is throwing me mostly off. But as I said, I did what I think was correct. (I used this as reference: http://www.financescholar.com/working-capital-npv.html)

    My workings is this:


    And I have saved the formulae as well:


    Note that depreciation here is not used at all since depreciation doesn't in itself generate any cash flow.

    2. This should be more straightforward, by using the first two rows in the table I posted, and the additional gain due to the salvation. I'm not sure if you have to deal with the capital gains tax though. If it's the same as the UK rules, then it'd be:

    (Proceeds - Cost - Annual Exemption) * Rate

    For UK, the annual exemption would be 10,600 and the rate would be 28% since the revenue exceeds the basic rate tax band (which is 37,500). But I'll say it again, this are the rules for UK tax.

  3. #3
    Elite Member
    Join Date
    Jun 2007
    Posts
    12,691
    Quote Originally Posted by dave_fmx View Post
    Hey, hopefully there are some smart people out there who have a better understanding of this than I do.

    There's a question regarding cashflow estimation and capital budgeting that is a bit beyond what I read in the textbook. give it a crack? here it is:

    QUESTION 2: Wing Yin Tsui, CEO of Lian Huang & Wong Bin Dean Hwang Manufacturing Limited is considering a four year project. The project requires an initial investment of $10,000,000 to buy new equipment. The equipment will be depreciated straight line to zero over the projectís life. The company believes it can generate $5,000,000 in pretax revenues in year 1. Revenues will increase at 20% per year. Total pretax operating cost would be 40% of the pretax revenues. Net working capital will be 20% of the pretax revenue for the year. Net working capital will be fully recovered at the end of the project. Revenues and operating costs will occur at the end of the year and investment in net working capital will be made at the beginning of the year. The tax rate is 40% and the discount rate is 12%.


    1) What is the NPV of the project?


    2) Now compute the projectís NPV assuming the project is abandoned after one year. The equipment will be salvaged for $8,000,000. Any gain or loss due to selling the equipment for other than the book value will create taxable gain/loss.

    ------
    You're a finance master if you can do this!
    This looks like a Take-home examination (project). Are you sure you are supposed to seek outside help - without doing any work - on this?
    ď... mathematics is only the art of saying the same thing in different wordsĒ - B. Russell

  4. #4
    New Member
    Join Date
    Apr 2012
    Location
    Toronto Canada
    Posts
    3
    Quote Originally Posted by Subhotosh Khan View Post
    This looks like a Take-home examination (project). Are you sure you are supposed to seek outside help - without doing any work - on this?
    It's exam time here in Canada right now.. This was a question on a past final that I was given. You see, I can't ask the prof because they generally don't like it when students find past exams and study from them. Either way, my exam is this week and I'd really like some help with this one if anyone has any advice I'd appreciate it.

  5. #5
    New Member
    Join Date
    Apr 2012
    Location
    Toronto Canada
    Posts
    3
    Quote Originally Posted by Unknown008 View Post
    1. I gave this a try. I haven't done much on NPVs and the working capital is what is throwing me mostly off. But as I said, I did what I think was correct. (I used this as reference: http://www.financescholar.com/working-capital-npv.html)

    My workings is this:


    And I have saved the formulae as well:


    Note that depreciation here is not used at all since depreciation doesn't in itself generate any cash flow.

    2. This should be more straightforward, by using the first two rows in the table I posted, and the additional gain due to the salvation. I'm not sure if you have to deal with the capital gains tax though. If it's the same as the UK rules, then it'd be:

    (Proceeds - Cost - Annual Exemption) * Rate

    For UK, the annual exemption would be 10,600 and the rate would be 28% since the revenue exceeds the basic rate tax band (which is 37,500). But I'll say it again, this are the rules for UK tax.
    I'm pretty sure that the depreciation should be added back since it's a non cash expense, either at a flat rate or capital cost allowance rate

  6. #6
    Elite Member
    Join Date
    Feb 2004
    Location
    Ottawa, Ontario
    Posts
    12,208
    Quote Originally Posted by dave_fmx View Post
    ... You see, I can't ask the prof because they generally don't like it when students find past exams and study from them.
    Is that right? I'm surprised. In my days, profs would usually recommend we'd do that.
    You see, the more students get pass marks, the more it reflects on the teacher!

    Anyway, you have lots of time to study: the Toronto Maple Leafs are out of the playoffs
    I'm just an imagination of your figment !

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •