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    Asis 6 (CH 10) - Pertanyaan

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    Andre Jonathan
    The document discusses capital budgeting and investment decisions. It provides definitions for key concepts like incremental cash flows, standalone principle, sunk costs, and opportunity costs. It also outlines the steps to evaluate a capital investment project, which includes constructing an income statement, calculating operating cash flows using different approaches, determining net capital spending and changes in working capital over time, calculating cash flows for each period, applying investment criteria like NPV, and making a decision. Three practice questions are provided at the end to apply these concepts.

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    Asis 6 (CH 10) - Pertanyaan

    Uploaded by

    Andre Jonathan
    16 views2 pages
    The document discusses capital budgeting and investment decisions. It provides definitions for key concepts like incremental cash flows, standalone principle, sunk costs, and opportunity costs. It also outlines the steps to evaluate a capital investment project, which includes constructing an income statement, calculating operating cash flows using different approaches, determining net capital spending and changes in working capital over time, calculating cash flows for each period, applying investment criteria like NPV, and making a decision. Three practice questions are provided at the end to apply these concepts.

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    Asis 6 (Ch 10)_Pertanyaan

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    The document discusses capital budgeting and investment decisions. It provides definitions for key concepts like incremental cash flows, standalone principle, sunk costs, and opportunity costs. It also outlines the steps to evaluate a capital investment project, which includes constructing an income statement, calculating operating cash flows using different approaches, determining net capital spending and changes in working capital over time, calculating cash flows for each period, applying investment criteria like NPV, and making a decision. Three practice questions are provided at the end to apply these concepts.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    16 views2 pages

    Asis 6 (CH 10) - Pertanyaan

    Uploaded by

    Andre Jonathan
    The document discusses capital budgeting and investment decisions. It provides definitions for key concepts like incremental cash flows, standalone principle, sunk costs, and opportunity costs. It also outlines the steps to evaluate a capital investment project, which includes constructing an income statement, calculating operating cash flows using different approaches, determining net capital spending and changes in working capital over time, calculating cash flows for each period, applying investment criteria like NPV, and making a decision. Three practice questions are provided at the end to apply these concepts.

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    of 2

    Manajemen Keuangan – Asis 6

    Ch 10 – Making Capital Investment Decisions


    Question 1
    Consider the following income statement: Sales $864,350; Costs 501,500; Depreciation 112,000; EBIT?; Taxes (34%); Net
    income? Fill in the missing numbers and then calculate the OCF using:
    • Most Common Financial Calculation
    • Tax Shield
    • Top-Down
    • Bottom-Up

    Question 2
    Hero Bumi Langit, Inc., projects unit sales for a new seven-octave voice emulation implants as follows:
    Year 1 2 3 4 5
    Unit Sales 93,000 105,000 128,000 134,000 87,000
    Production of the implants will require $1,800,000 in net working capital to start and additional working capital investments
    each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,200,000 per
    year, variable production costs are $265 per unit, and the units are priced at $380 each. The equipment needed to begin
    production has an installed cost of $21,000,000. This equipment will last for seven years and depreciated using straight-line
    method. In five years, this equipment can be sold for about 20 percent of its acquisition cost. The company is in the 35
    percent marginal tax bracket and has a required return on all its projects of 18 percent. What is the NPV of the project?

    Question 3
    Hot Toys Inc. plans to produce wireless products to fulfill the needs of household industry. From market research data, the
    estimate sale is 100,000 units per year.
    Due to the rapid development of technology, this product will only have a useful life of 4 years. To produce this new product,
    then Hot Toys must buy new equipment costing $ 8 million. Equipment is depreciated by the straight-line method over 4
    years. In addition, Hot Toys also needs to invest in software as the supporting role in production process for the product.
    The software investment is worth $ 4 million. The software is amortized using the straight-line method over 4 years.
    The products will be sold at the wholesale price for $ 260 per unit. Variable production costs incurred by Hot Toys are
    estimated to be $ 110 per unit and will increase by 5% per year. Meanwhile, the production fixed costs is estimated to be $
    25,000 per year.
    At the end of the first year, the expected product is ready for sale. Therefore, the company will spend $ 100,000 for
    distribution and marketing needs each year. Currently the marginal tax rate is 34%. The interest rate is 12% per year.
    a. How much is the initial investment required?
    b. What is the annual operating cash flow for this project?
    c. Calculate the NPV of the project.

    1
    Manajemen Keuangan – Asis 6
    Ch 10 – Making Capital Investment Decisions
    The incremental cash flows for project evaluation consist of any and all changes in the firm’s future cash flows that are a
    direct consequence of taking the project.
    Incremental Cash Flows: The difference between a firm’s future cash flows with a project and those without the project.
    Stand-alone Principle: The assumption that evaluation of a project may be based on the project’s incremental cash flows.
    Sunk Cost: A cost that has already been incurred and cannot be removed and therefore should not be considered in an
    investment decision.
    Opportunity Cost: The most valuable alternative that is given up if a particular investment is undertaken.
    Project cash flow = Project OCF - Project change in NWC - Project Capital Spending
    Operating cash flow = Earnings before interest and taxes + Depreciation – Taxes
    Alternative Definitions of Operating Cash Flow
    1. The Bottom-Up Approach
    OCF = Net income + Depreciation
    2. The Top-Down Approach
    OCF = Sales – Costs – Taxes
    3. The Tax Shield Approach
    OCF = (Sales – Costs) X (1 – T) + Depreciation X T

    After-tax Salvage Value = Market Value – Tax Rate (Market Value – Book Value)
    Market Value = Book Value → After-tax Salvage Value = Market Value
    Market Value < Book Value → Tax Refund
    Market Value > Book Value → Tax Liability
    Step in Capital Budgeting
    1. Construct Income Statement
    2. Calculate OCF (EBIT + Depreciation – Tax)
    3. Calculate Net Capital Spending for Each Period
    4. Calculate Change in Net Working Capital for Each Period
    5. Calculate Cash Flow for Each Period
    6. Apply Investment Criteria
    7. Make Decision

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