CASE 8 Capital Budgeting Accept Reject and Ranking Decisions First you want to divide the two divisions up Then you want to analyze the Projects to find out if you have any mutually exclusive projects Year 0 1 2 3 4 5 6 7 8 9 10 Project A 1 750 000 318 633 318 633 318 633 318 633 318 633 318 633 318 633 318 633 318 633 318 633 Project B 1 800 000 458 154 458 154 458 154 458 154 458 154 Project C 1 750 000 900 000 675 000 450 000 275 000 Project D 2 500 000 431 700 431 700 431 700 431 700 431 700 431 700 431 700 431 700 431 700 431 700 Project E 2 700 000 483 000 483 000 483 000 483 000 483 000 483 000 483 000 483 000 483 000 483 000 Find the NPV and IRR by using the CF function on the calculator If NPV is negative reject NPV IRR A 207 862 12 7 B 63 236 8 62 C 151 953 14 87 Project D because it has a higher NPV and IRR D 152 610 11 4 E 267 826 12 26 We reject Project B because it has a negative NPV D E were mutually exclusive we accept Project E over A C are mutually exclusive A has a higher NPV but C has a higher IRR So we must compute MIRR MIRR for A was 11 2 and C was 12 3 This means that the NPV profiles cross and we need to look at some alternative measures If one project has a higher IRR and the other a higher NPV this means they cross To find the Crossover Rate find the difference between Project cash flows each year Then enter info Into CFLO and press IRR For Case 8 this is 11 2 This means that if the cost of capital were 11 2 or Higher NPV and IRR would prefer project C Cross over point IRR Accept project with higher NPV and if the Cross over point IRR Accept project with higher IRR To find the Discounted Payback Period For A There are 10 CFs PVCF 1 N 1 Do this for each CF all the way to year 10 I 10 After you compute each year PV keep a cumulative total FV 318 633 CF 1 PV 289 666 so subtract that from Year 0 1 750 000 289 666 1 460 334 CPT PV 289 666 Once we get to CF 8 cumulative total we only have 50 115 left to recover so we know that the Discounted Payback Period has to be between year 8 and 9 We take the cum Total of CF 8 and divide it by the PV of CF 9 So it should look like 8 50 115 135 131 8 37 years So if liquidity is a factor Project C is more attractive The shorter the payback period the better the investment because this is a measure of how Liquid an asset is CASE 9 and 10 Analysis of Investment Performance Your Consulting group has been retained by a major pension fund to perform an analysis of the investment performance of Kimberly Clark In other words how good or bad has the corporation been doing in their asset investment decisions Are they investing in good assets You have been asked to provide convincing support for your conclusions Include your estimate of Market Value Added MVA and Economic Value Added EVA as defined in your text Then redo your analysis using our MVA and EVA shortcuts 1 MVA Price per Share BVPS Shares Outstanding OR MVA Market Value of Equity Book Value of Equity MVA 0 Good MARKET VALUE ADDED This is the difference between the equity market valuation of a listed quoted company and the book value of equity invested in the company A high MVA indicates that the company has created substantial wealth for the shareholders Negative MVA means that the value of the actions and investment s of management is less than the value contributed to the company by the capital markets This means that wealth or value has been destroyed 2 EVA NOPAT WACC OPERATING CAPITAL where NOPAT EBIT 1 T 1 5OPERATING CAPITAL NOWC NET FIXED ASSETS NOWC OPERATING CURRENT ASSETS OPERATING CURRENT LIABILITIES 3 WACC Wd Rd 1 T Rcs Wcs 2 NOWC Cash AR Inventories AP Accrued Expenses FIXED ASSETS PP E 4 ECONOMIC VALUE ADDED Economic value added EVA is a way to determine the value created above the required return for the shareholders of a company EVA attempts to measure the true economic profit produced by a company and provides a measurement of a company s economic success or failure over a period of time Such a metric is useful for investors who wish to determine how well a company has produced value for its investors and it can be compared against the company s peers for a quick analysis of how well the company is operating in its industry EVA can be measured as Net Operating Profit After Taxes or NOPAT less the money cost of capital Money cost of capital refers to the amount of money rather than the proportional rate cost of capital Once again shareholders of the company will receive a positive value added when the return from the capital employed in the business operations is greater than the cost of that capital EVA 0 Good 3 MBE P BVPS Form of MVA If the company has created wealth for its shareholders the ratio has to exceed 1 1 Good ROTC WACC should exceed 1 if the company is investing in good assets 1 Good ROE Rs should be greater than 1 for a company with solid investment performance 1 Good CASE 11 Net Working Capital Requirements First Year 1 233 20 1 988 40 1 1 145 10 60000 1 426 80 30000 649 70 25000 629 40 20000 Current Year 845 50 1 319 90 0 864 40 0 1 280 70 0 20 30 0 0 Second Year 1 621 40 2 430 60 2 1 398 20 90000 1 622 10 50000 1 031 70 25000 382 00 20000 Third Year 1 920 60 2 780 10 3 1 642 40 90000 1 784 30 50000 1 274 00 25000 242 30 20000 Fourth Year 2 103 20 2 962 40 4 5 1 985 20 90000 1 901 20 50000 1 179 20 25000 94 80 20000 0 0 0 0 Inventory Accounts Receivable TradeAccnts Payable Inventory Accrued Expenses Accounts Receivable NOWC Accounts Payable NOWC Accruals NOWC Funding needs under Aggressive NOWC management 95000 Net Working Capital Under Conservative NOWC management the firm will try to have financing for entire anticipated increase in NOWC 629 4 382 0 242 3 1 253 7 in Current Year 50000 Incremental NWC Conser Incr NWC 0 30000 Lease 0 Equipment 0 Salvage 0 After Tax Salvage 0 45 MACRS 0 0 95000 30000 100000 0 0 0 45000 45000 0 30000 0 0 0 0 33 95000 0 0 30000 0 …