Finance with John Elder
LE#6  Capital Budgetin

RWJ Chapter 10, #9-12.  These are capital budgeting questions.

Note: You can set up capital budgeting problems in a manner similar to the XTECH.COM capital budgeting problem that we discussed in class. This is the most basic framework, and it will always work. You will find it worthwhile to work through that detailed example first.  It involves is a simple pro-forma income statement, and using that income statement to generate the cash flows from operations.  Cash flows from NWC and capital spending are calculated separately. Recall that Cash Flow = OCF + Net capital spending + additions to NWC.

For #9, I used my spreadsheet template (see "CB template" on on-line syllabus).  In particular, I modified the income statement to fit the data in the problem, and got this:
Pro Forma Income Statement Growth  0 1 2 3
  Rate 2005 2006 2007 2008
           
Total Revenue 0.0%   3,100.00 3,100.00 3,100.00
Cost of Revenue 0.0%   990.00 990.00 990.00
Gross Profit     2,110.00 2,110.00 2,110.00
Gross Profit Margin     68.1% 68.1% 68.1%
Operating Expenses          
  Research Development/Other 0.0%   0.00 0.00 0.00
  Selling General and Administrative 0.0%   0.00 0.00 0.00
Operating Income or Loss     2,110.00 2,110.00 2,110.00
Operating Margin     68.1% 68.1% 68.1%
Income from Continuing Operations          
  Depreciation     1,400.00 1,400.00 1,400.00
  Earnings Before Interest And Taxes     710.00 710.00 710.00
  Interest Expense     0.00 0.00 0.00
  Income Before Tax     710.00 710.00 710.00
  Income Tax Expense 35.0%   248.50 248.50 248.50
Net Income     461.50 461.50 461.50

Try this at home, and see if you can verify that OCF is 1,861.50 (on the "Cash Flows" tab of my spreadsheet).