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Ocean Carriers Essay

1812 words - 8 pages

Valuing Capital Investment Projects
1. A.
1) Project A:
|Project A |Year 1 |Year 2 |Year 3 |
|Revenue |21000 | |  |
|Expenses |11000 |  |  |
|Before-tax cash flow (1) |10000 | |  |
|Depreciation |10000 |  |  |
|Before-tax income |0 | |  |
|Tax (2) |0 |  |  |
...view middle of the document...

8 |1111.2 |4444.8 |
|After-tax cash flow (1)-(2) |4066.2 |4999.8 |10000.2 |

The payback period is 3 years.

Project D:
|Project D |Year 1 |Year 2 |Year 3 |
|Revenue |30000 |10000 |5000 |
|Expenses |15555 |5555 |2222 |
|Before-tax cash flow (1) |14445 |4555 |2778 |
|Depreciation |3333 |3333 |3333 |
|Before-tax income |11112 |1222 |-555 |
|Tax (2) |4444.8 |488.8 |-222 |
|After-tax cash flow (1)-(2) |10000.2 |4066.2 |3000 |

The payback period is 1 years.

Ranking: A = D > B > C

2) Project A:
|Project A |Year 1 |Year 2 |Year 3 |
|Revenue |21000 | |  |
|Expenses |11000 |  |  |
|Before-tax cash flow |10000 | |  |
|Depreciation |10000 |  |  |
|Before-tax income |0 | |  |
|Tax |0 |  |  |
|Net income |0 |  |  |

AAR = 0

Project B:
|Project B |Year 1 |Year 2 |Year 3 |
|Revenue |15000 |17000 |  |
|Expenses |5833 |7833 |  |
|Before-tax cash flow |9167 |9167 |  |
|Depreciation |5000 |5000 |  |
|Before-tax income |4167 |4167 |  |
|Tax |1666.8 |1666.8 |  |
|Net income |2500.2 |2500.2 |  |

AAR = [(2500.2+2500.2)/2]/(10000/2) = 50.004%

Project C:
|Project C |Year 1 |Year 2 |Year 3 |
|Revenue |10000 |11000 |30000 |
|Expenses |5555 |4889 |15555 |
|Before-tax cash flow |4555 |6111 |14445 |
|Depreciation |3333 |3333 ...

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