CASE 8- Capital Budgeting: Accept/Reject and Ranking DecisionsFirst 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.Find the NPV and IRR by using the CF function on the calculator. If NPV is negative, reject. NPV IRRA 207,862 12.7% We reject Project B because it has a negative NPV.B (63,236) 8.62% D & E were mutually exclusive, we accept Project E over 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% .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% orHigher, NPV and IRR would prefer project C. Cross over point > IRR = Accept project with higher NPV andTo find the Discounted Payback Period: if the Cross over point < IRR = Accept project with higher IRR.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 PerformanceYour 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 beendoing 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 #2NOWC = (Cash + AR + Inventories) – (AP + Accrued Expenses) FIXED ASSETS = PP&E #4ECONOMIC 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, GoodROTC / WACC  should exceed 1 if the company is investing in ‘good assets’ > 1, GoodROE / Rs  should be greater than 1 for a company with solid investment performance > 1, GoodCASE 11- Net Working Capital Requirements CASE 12- Capital Budgeting/ Cash FlowsInv. = $60,000 in the 1st year building up to a max of $90,000 by the end of the 2nd yr.A/R = $30,000 in the 1st yr. and should reach a max of $50,000 by the end of the 2nd yr.A/P and Accruals = projected at $25,000 and $20,000 respectively and should reach these levels in the first year.NOWC= assets (inventory + A/R) – liabilities (A/P + accruals)Incr. change in NOWC= (yr. 1) 0 – 45,000 = 45,000; (yr. 2) 95,000 – 45,000 = 50,000(yr. 3 & 4) 95,000 – 95,000 = 0; (yr. 5) 45,000 + 50,000 = -90,000Lease= given, 30,000/yrEquipment = givenSalvage= 18,000 at end of useful lifeAfter tax salvage = salvage * marginal tax rate (35%) Subtract this number from salvageMACRS = given, 3 yr scheduleDepreciation = MACRS * equipmentRevenues= 600 * 2000 = 1,200,000/yrCost of Component= .7 * revenues (1.2 M)Labor and supply/utilities= givenEBIT= Revenues – costs (components, labor, utilities, lease, depreciation)EBIT (1-T) = EBIT * (1 – marginal tax rate)CF = EBIT (1-T) + Depr. – conserv. NOWC – FA (PP&E) + after-tax salvage NPV > 0, accept CASE 14- Capital BudgetingOption 1- New FacilityYear 0 Year 1 Year 2 Year 3 Year 4 Year 5New Unit Sales0 85,000 100,000 110,000 110,000 110,000Current Unit Sales0 75,000 75,000 75,000 75,000 75,000Project Unit Sales0 10,000 25,000 35,000 35,000 35,000Price per Unit $0 $200 $200 $200 $200 $200Old Revenue $0 $15,000,000 $15,000,000 $15,000,000 $15,000,000 $15,000,000Year Project A Project