Essay - Wacc 1) We Will Assume that the Old Machine is...

WACC

1) We will assume that the old machine is fully depreciated. Th***** makes the tax burden on the disposal as $34,000. The depreciati***** expense on the new machine ***** reduce the tax burden, and the cost savings are assumed to translate directly to profit, which will increase the tax burden. The net effect is an increase in ***** burden from the new mach*****e of $37,400 per year, which subtracts from the cost savings, giving a net ********** cash flow of $432,600. The net present value of ***** new machine therefore becomes $1,715,925.02. The present cash *****s are the outlay for the new machine, the proceeds from the ***** of ***** ***** machine and the tax on those proceeds. This *****tals $1,734,000. *****refore, the NPV of ***** purchase ***** the new machine is -$18,074.98. Theta Widgets should not ***** the new *****.

2) Capital budgeting decisions ***** complex. There are many variables that must be taken into consideration. Moreover, ***** information being used to make the decision is almost entirely based on estimates. The more accurate the inputs, the str*****ger the decision, but much of what goes in***** a capital budget*****g decision is variable.

Inflation, for example, can have a signifi*****t imp*****ct on the outcome of the *****. For the most part, cost of capital reflects past conditions. There may be some element ***** future *****, but as soon as a variable such ***** inflation differs from the ***** rate of inflation, the figures changes. The cost of capital used to make the decision has an assumed ***** ***** ***** built into it. If the rate of inflation increases, that cost of capital becomes obsolete. For this reason, comp*****ies should set a conservative hurdle rate ***** assumes ***** adverse movement in the rate ***** inflation. Even in doing so, most companies will bear the risk of a sharp spike in *****flation rates.

***** future cash flows would, in *****ory, need to be discounted at a higher r*****e to reflect the change ***** inflation. This will adversely affect ***** ***** value of those cash flows. ***** in turn will reduce the present value of those flows, and can erode the positive ***** present ***** that was derived ***** order to ***** the investment ***** in the first place. A firm ***** ideally ***** able to pass the *****flation on to *****ir customers in order to balance off the deteriorati***** ***** value of the cash flows.

Capital investment decisions ***** filled with uncertainty. There are several ways ***** a company ***** limit this uncertainty or build in safeguards against adverse consequences. The ***** is to get ***** best information possible prior to making an ***** dec*****ion. ***** figures ***** for future cash flows are going to be estimates, but some ***** ***** better th***** others. The higher the quality of the information in the first place, the more accurate your NPV calculations will be.

**********her way to deal ***** uncertainty is to make conservative estimates. A project that only has a *****