capital budgeting question

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

capital budgeting question

Postby aroranidhi2004 » Wed Mar 04, 2015 5:17 pm

Can you please explain in detail, how we are considering WCinv in the intial outlay and calculating the terminal value with examples?

if we say that the project will free up 500$ WC initially and that effect will get reversed at the end of the project. than while calculating the initial outlay are we subtracting that amount? and what will happen to that at the end of the project when we are calculating terminal value?

Regards
Nidhi

aroranidhi2004
Finance Junkie
Posts: 41
Joined: Thu Oct 16, 2014 4:51 pm

capital budgeting question

Postby aroranidhi2004 » Thu Mar 05, 2015 5:22 pm

Can please someone answer this question?

edupristine
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Joined: Wed Apr 09, 2014 6:28 am

capital budgeting question

Postby edupristine » Fri Mar 06, 2015 2:12 pm

Hi, for your second part the answer is had project freed up $500 working capital initially, then the initial investment in net working capital would have been negative or cash inflow (subtracted the amount) and terminal value effect would have been cash outflow.

For your first question let's take up the following assumptions:
1. Fixed Capital Investment= $2200
2. Working Capital Investment= $500
3. Cash proceeds from sale of Fixed capital= $1000
4. Book Value of fixed capital sold= $700
5. Tax rate= 40%

Intital Outlay= Fixed Capital + Working Capital Investment
= 2200+ 500= $2700
Terminal Value= Cash proceeds from sale of fixed asset + Net Working Capital + Tax (Cash proceeds from sale of fixed asset + Book value of fixed asset sold)
= 1000 + 500 + 40%(1000-700) = $1620


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