# Capital Budgeting

Question about the example on page 27 of Book 3 in the Schweser Notes: Given Information: Length of Project (Yrs) 3 Unit Sales (per Yr) \$1,500.00 Price \$50.00 Variable Cost (Per Unit) \$20.00 Fixed Cost (Per Yr) \$5,000.00 FCInv \$60,000.00 NWCInv \$15,000.00 Salvage Value (End of 3 Yrs) \$10,000.00 Marginal Tax Rate 40% Cost of Capital 15% Depreciate SL over 3 Yrs to BV 0 The example says NPV = \$11,871 and IRR is 23.5%, but I can’t figure out how they get these numbers. Here are my calculations: Initial Outlay NWCInv + FCInv \$15,000.00 + \$60,000.00 Total Outlay \$75,000.00 Depreciation 75,000 - 10,000 / 3 \$21,666.67 Operating CF (Sales - Cost)(1 - Tax Rate) + (Depreciation * Tax Rate) CF(1) = ((1,500*50) - ((1,500*20)+5,000))*(1 - .4) + (21,666.67*.4) CF(1) \$32,666.67 CF(2) = ((1,500*50) - ((1,500*20)+5,000))*(1 - .4) + (21,666.67*.4) CF(2) \$32,666.67 CF(3) = ((1,500*50) - ((1,500*20)+5,000))*(1 - .4) + (21,666.67*.4) CF(3) \$32,666.67 Terminal Year CF Salvage Value + NWCInv - (Tax (Salvage - Book Value)) 10,000 + 15,000 - (.4*(10,000 - 0)) 21,000.00 CF0 (75,000.00) CF1 \$32,666.67 CF2 \$32,666.67 CF3 \$53,666.67 NPV \$11,646.26 IRR 24.60% Any help would be appreciated…those calculations were done in Excel, but when I use my financial calculator NPV = \$13,393???

I don’t have the book with me… but I think you want to depreciate the full fixed capital investment over three years. Don’t depreciate NWCInv, cause you get that back. And don’t deduct the 10,000 from the depreciation calculation, because the problem says to take book value down to zero at the end of year 3. So depreciation should be 60/3 = 20 per year.

you are right, thanks a million.