Description
working of MSDI case used in Strategic Financial Management.
KeyWords: WACC, NPV, Cash Flows
Year 1. Savings in Operating Costs due to use of new equipment Operating Costs (Semi Automatic) Operating Costs (New Equipment) Savings in Operating Cost
1987 0
Cost of new machine Book Value of old machine Proceeds from Sale of new machine Loss from Sale Net Block 2. Depreciation New WDV Effective Cost of New Machine (after considering resale value of old Machine) Old Machine New Machine Additional Depreciation (New Machine) Depreciation Tax Shield (Tax*Depreciation)
61525 1605 950 655 62180
62180
3. Cash Flows (in Pesetas) Years Cash Outflow Additional Cash Inflow Total Cash Flows Total Cash Flows (After Tax)
0 -60575 0 -60575 -60575
4. Alternative 1 : Discounting in foreign Currency and using spot exchange rate Spot Exchange Rate Cost of Debt (in Spain) Sovereign Spread (Difference between cost of debts) Cost of Equity Inflation Rate ( Spain) Inflation Rate (USA) Hurdle Rate (USA) WACC NPV (In Pesetas) NPV (In USD) 5. Alternative 2 : Applying US Discount Rates
WACC (given) Cost of Debt Weight of Debt Component Weight of Equity Component Cost of Equity WACC %
Inflation Rate in US (Domestic - Rd) Inflation Rate in Spain (Foreign - Rf) Forward Rates using Law of one price (Pesetas/US $)
4% 8% 127.0
Cash Flows in US $ (After Tax) NPV
-477 94.44
1988 1 88496 69676 18820
1989 2 88662 69808 18854
1990 3 93686 73763 19923
1991 4 97634 76872 20762
1992 5 101091 79594 21497
1993 6 104872 82571 22301
1994 7 109101 85901 23200
60575 535 6218 5683 1989.05
535 6218 5683 1989.05
535 6218 5683 1989.05
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
1 20809.05 20809.05 14222.05
2 20843.05 20843.05 14244.15
3 21912.05 21912.05 14939
4 22938.3 22938.3 15671.6
5 23673.3 23673.3 16149.35
6 24477.3 24477.3 16671.95
7 25376.3 25376.3 17256.3
127 15 6.50 19.99 0.08 0.04 0.13 17.35% 11993.62 94.44
13 8.50 0.061837782 0.938162218 13.493 13%
131.9
137.0
142.2
147.7
153.4
159.3
165.4
108
104
105
106
105
105
104
1995 8 113765 89573 24192
1996 9 119012 93704 25308
1997 10 124872 98318 26554
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
8 26368.3 26368.3 17901.1
9 27484.3 27484.3 18626.5
10 28730.3 28730.3 19436.4
171.8
178.4
185.2
104
104
105
doc_467656661.xls
working of MSDI case used in Strategic Financial Management.
KeyWords: WACC, NPV, Cash Flows
Year 1. Savings in Operating Costs due to use of new equipment Operating Costs (Semi Automatic) Operating Costs (New Equipment) Savings in Operating Cost
1987 0
Cost of new machine Book Value of old machine Proceeds from Sale of new machine Loss from Sale Net Block 2. Depreciation New WDV Effective Cost of New Machine (after considering resale value of old Machine) Old Machine New Machine Additional Depreciation (New Machine) Depreciation Tax Shield (Tax*Depreciation)
61525 1605 950 655 62180
62180
3. Cash Flows (in Pesetas) Years Cash Outflow Additional Cash Inflow Total Cash Flows Total Cash Flows (After Tax)
0 -60575 0 -60575 -60575
4. Alternative 1 : Discounting in foreign Currency and using spot exchange rate Spot Exchange Rate Cost of Debt (in Spain) Sovereign Spread (Difference between cost of debts) Cost of Equity Inflation Rate ( Spain) Inflation Rate (USA) Hurdle Rate (USA) WACC NPV (In Pesetas) NPV (In USD) 5. Alternative 2 : Applying US Discount Rates
WACC (given) Cost of Debt Weight of Debt Component Weight of Equity Component Cost of Equity WACC %
Inflation Rate in US (Domestic - Rd) Inflation Rate in Spain (Foreign - Rf) Forward Rates using Law of one price (Pesetas/US $)
4% 8% 127.0
Cash Flows in US $ (After Tax) NPV
-477 94.44
1988 1 88496 69676 18820
1989 2 88662 69808 18854
1990 3 93686 73763 19923
1991 4 97634 76872 20762
1992 5 101091 79594 21497
1993 6 104872 82571 22301
1994 7 109101 85901 23200
60575 535 6218 5683 1989.05
535 6218 5683 1989.05
535 6218 5683 1989.05
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
1 20809.05 20809.05 14222.05
2 20843.05 20843.05 14244.15
3 21912.05 21912.05 14939
4 22938.3 22938.3 15671.6
5 23673.3 23673.3 16149.35
6 24477.3 24477.3 16671.95
7 25376.3 25376.3 17256.3
127 15 6.50 19.99 0.08 0.04 0.13 17.35% 11993.62 94.44
13 8.50 0.061837782 0.938162218 13.493 13%
131.9
137.0
142.2
147.7
153.4
159.3
165.4
108
104
105
106
105
105
104
1995 8 113765 89573 24192
1996 9 119012 93704 25308
1997 10 124872 98318 26554
0 6218 6218 2176.3
0 6218 6218 2176.3
0 6218 6218 2176.3
8 26368.3 26368.3 17901.1
9 27484.3 27484.3 18626.5
10 28730.3 28730.3 19436.4
171.8
178.4
185.2
104
104
105
doc_467656661.xls