Course project 3



Course Project 3

Introduction

Placement of long-term capital in industrial, agricultural, transportation or any sector whether inside the country or abroad, the purpose is to make a profit. Capital investment is linked to capital formation and financial oligarchy.

This part focused on challenges that the financial managers of FedEx Corporation will face to open up new branch in Canada after the analysis of the hypothetical scenario made by FedEx to expand their operation in Canada.

Discussion

FedEx is considering the investment proposal for the investment in Canada. In order to see the Net present Value of the investment, the weighted average cost of capital (WACC) that you should have computed which is 4.2%. To construct the Year by Year after Tax Cash (ATCF) of the proposed project the following formula will define clearly:

ATCF = [Revenues - operating expenses] * (1 - T) + [Ann. Dep * Tax] - Investment undertaken in that year.

As revenues and expenses are in Canadian dollars and we need to express the after-tax cash flow in U.S. dollars. We will convert revenues and expenses in U.S. dollars and for the Interest Rate Parity” equation will be:

                         E(ST) = S0 x (1+RL)T/(1+RFOREIGN)T

Therefore, the depreciation would be as followed:

Investment in Machinery and Equipment

Depreciation

8,000,000

1250000

8,000,000

1250000

4,000,000

750000

Year

Investment in Machinery and Equipment

Purchase of office Supplies

Direct and indirect labor

Marketing Expenses

Revenues

Depreciation Equipment 1

Depreciation Equipment 2

Depreciation Equipment 3

Total Depreciation

For the Year

0

8,000,000

0

0

397,614

0

 

 

 

1

8,000,000

19,881

4,771,372

795,229

7,952,286

1250000

 

 

1250000

2

4,000,000

9940.36

5,566,600

685,885

12,922,465

1250000

1250000

 

2500000

3

0

9940.36

5,566,600

685,885

12,922,465

1250000

1250000

750000

3250000

4

0

9940.36

5,566,600

685,885

12,922,465

1250000

1250000

750000

3250000

5

0

9940.36

5,566,600

685,885

12,922,465

1250000

750000

2000000

6

0

9940.36

5,566,600

685,885

12,922,465

 

 

750000

750000

For the tax purpose the depreciation on the investment would be for four years. Therefore, the depreciation mount for the 1st equipment at the end of the first year would be (8,000,000-3,000,000)/4 = 1,250,000 for 2nd equipment it would be (8,000,000-3,000,000)/4 = 1,250,000 while for 3rd equipment would be (4,000,000-1,000,000)/4 = 1750000. At the end of second year the same amount would be deduct as well as for 3 and 4 years. On 5th year the value of machinery and equipment investment would be zero on t he balance sheet and thus in 5th year this part will no longer be part of depreciation for tax intentions.

During 1, 2, 3 and 4, FedEx would receive a tax 'rebate' which will equal to the annual depreciation, times the tax rate of 34 percent. Year by year, the after tax cash flow derive from the investment will achieve through subtracting each years' after tax cash flow the amount on investment that is required in that year (Brigham, Ehrhardt M., 2011).

Cash flow for the year:

ATCF0 = ...