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Capital Budgeting Examples

Anthony Ubaka's Profile

Capital Budgeting ExamplesMy sister brought me this accounting question which unfortunately is my not field. So i was hoping to get some help from any accounting professional, maybe with this or other capital budgeting examples:

 Question:
If a company can purchase a new copier that will save $5,000 per year in copying costs, and the copier will last for six years and have no salvage value,what is the maximum purchase price the company should be willing to pay for the copier if the company's required rate of return is: 10%? 16%?

Answers

Scott Lane
Title: CFO and CRO
Company: TPG Credit Management
(CFO and CRO, TPG Credit Management) |

I would look at this as a time value of money calculation. So you have a marginal positve cash flow of $5k per year over 6 years with discount rates of 10% and 16%. I put an example at the below link. My calculations show a vale of $22k at 10% hurrdle and $19k at 16% hurrdle.

https://spreadsheets.google.com/ccc?key=0AiDud81wh70jdF82SjNlc28yUUNUU1Fna2p1SE16RFE&hl=en

Anthony Ubaka
Title: Global Credit Manager/Asst Tre
Company: in-between-Jobs
(Global Credit Manager/Asst Tre, in-between-Jobs) |

Thank you so very much Scott for helping me and my sister out on this accounting subject.

Regards,
Anthony

Ray Salomon
Title: CFO
Company:
(CFO, ) |

If you are looking at a copier costing more than $20,000 and have enough volume to save $5,000 a year, you have far greater needs than most users. As such, I would call in all of the vendors and obtain their detailed analyses. The driver for your decision will likely be the annual cost savings rather than the hurdle rate. As such, this should be the focus of the analysis.

Also, you may want to look at the alternative of buying a second monitor for your firm's computers. Many people print hard copies so that they can refer to it while working on another document. A second monitor allows the reference document to be displayed, thus avoiding the need for printing altogether.

Mariusz Mikolajczak
Title: CFO/ FD/ Controller CEE
Company: Archer Daniels Midland Poland
(CFO/ FD/ Controller CEE, Archer Daniels Midland Poland ) |

you need to go thru npv calc, assuming IRR=10% or 16& (later) where savings usd5k is included. Projection period = 6 years. Please make sure you assign the proper tax rate valid for your country. You get then not just the exact but rather the range of prices "from to" with little standard devation, to be narrowed by performing kind of quasi sensitivity analysis using one variable. Using excel the whole exercise should not take longer than 15 mins.
Please remember, you need to conduct separate calc for 10% and then for 16%.

Anthony Ubaka
Title: Global Credit Manager/Asst Tre
Company: in-between-Jobs
(Global Credit Manager/Asst Tre, in-between-Jobs) |

Thanks

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