AFTER-TAX ANALYSIS FOR BUSINESS EXPANSION


1. The next two spreadsheets perform an analysis of the four D-E mix scenarios





Conclusion: The 90% debt option has the largest PW at 10%. As mentioned in the chapter, the largest D-E financing option will always offer the largest return on the invested equity capital. But, too high of D-E mixes are risky.

2. Subtract 2 different equity CFAT totals.

For 30% and 10%:

(1,160,250 – 1,101,750) = $58,500



Divide by 2 to get the change per 10% equity increase.

58,500/2 = $29,250

Conclusion: Total CFAT increases by $29,250 for each 10% increase in equity financing.



3. This happens because as less of Pro-Fence’s own (equity) funds are committed to the Victoria

site, the larger the loan principal.



4. Use the EVA series as an estimate of contribution to Pro-Fence’s bottom line through time.



Equations used to determine the EVA use NOPAT (or NPAT) and interest on invested capital.



EVA = NPAT – interest on invested capital (column M)



NPAT = TI – taxes



(Interest on invested capital)t = i(BV in the previous year)

Note: BV on the entire $1.5 million in depreciable assets is used to determine the interest on invested capital.



Conclusion: The added business in Victoria should turn positive the third year and remain a contributor to the business after that, as indicated by the EVA values. Plus, the AW of EVA at the required 10% return is positive (AW = $113, 342).

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