incineration and running transport of the energy created

By Student’s Name

 

 

 

 

 

Code+ course name

Instructor’s Name

University Name

City, State

Date

 

 

 

 

 

Due to the increase in industrialization an urbanization, there has been an increase in the demand of transport worldwide. This has also been coupled by a number of metropolitan cities. However, this has also resulted of increased negative activities that include increased natural gas emission. In regard to the increase in the emission of gases, 19 million natural gases are emitted in the operation. In the current world, much natural gases. The research shows the new machines emission in different states:

 

Year New machine

Sh.

Old Machine

Sh.

1

2

3

4

5

6

7

8

9

10

350,000

400,000

420,000

410,000

410,000

380,000

380,000

350,000

300,000

280,000

280,000

300,000

320,000

340,000

340,000

320,000

310,000

280,000

260,000

240,000

The old grinder still has 5 more years.  Determine the NBV (today) after the lapse of 3 years using 15% depreciation rate.

 

Sh.’000’
First 3 years ago

Less: Depreciation 15%

Year 1

 

Year 2

 

Year 3

NBV “today” end of year 3

3,500

 

   525

2,975

   446

2,529

   379

2,150

 

The depreciation for the first 3 years is a sunk or historical variable, irrelevant in replacement decision.

Carry out the incremental analysis using the fifth steps

 

Compute incremental initial capital

 

Sh.‘000’
Price of new machine (dep. Cost)

Less: MV of existing machine

Add: Increamental net working capital

Current MV of existing machine

NBV today

Gain on disposal

 

 

 

4,000

2,150

1,850

7,000

(4,000)

Tax payable on gain = 30% x 1850 (outflow)

Increamental initial capital

   555

3,555

 

 

(ii)        Compute incremental depreciation  using 25% depreciation rate on reducing balance basis – over a period of 5 years.

New machine Depreciation Old machine depreciation Increamental depreciation
Depreciable cost

Year 1 dep at 25%

 

Year 2

 

Year 3

 

Year 4

 

Year 5 balancing figure

Salvage value at the end of year 5

7,000

1,750

5,250

1,313

3,937

  984

2,953

  738

2,215

2,005

 

210

2,150

  538

1,612

  403

1,209

  302

907

  227

680

  680

 

0

 

1750 – 538 =

 

1313 – 403 =

 

984 – 302 =

 

738 – 227 =

 

2005 – 680 =

 

1,212

 

910

 

682

 

511

 

1,325

 

4,640

 

Compute incremental salvage value

Salvage value of new machine

Less: old machine

Increamental salvage value end of year 5

210

   0

210

 

Compute annual operating cash flows and NPV using 12% cost of capital.

In deriving the operating cash flows:

 

                        Recall:

If incremental EBDT > Increamental depreciation p.a. then operating cash flows will be derived as:

EBDT less depreciation,

EBT less Tax,

Add back Depreciation,

EAT

 

EBDT

Less: Depreciation

EBT

Less Tax

EAT

Add back depreciation

Operating cash flows

XXX

  XX

XX

     X

XX

  XX

XX

 

If EBDT < Incremental depreciation p.a.

Then operating cash flows = EBDT(1 – T) + DTS

Where DTS = Depreciable tax shield = Depreciation p.a. x tax rate.

 

Increamental depreciation for each year is higher than increamental EBDT of Ksh.400, 000 p.a.

 

 

Sh.’000’
Year EBDT(1-T) DTS Operating Cash flows

 

PVIF12%,n P.V
1. 400(1-0.3)

= 280

1213 x 0.3

= 364

280 + 364

= 644

 

0.893    575
2. 400(1-0.3)

= 280

910 x 0.3

= 273

280 + 273

= 553

 

0.797    441
3. 400(1-0.3)

= 280

682 x 0.3

= 205

280 + 205

= 485

 

0.712    345
4. 400(1-0.3)

280

511 x 0.3

= 153

280 + 153

= 433

 

0.636    275
5. 400(1-0.3)

280

1325 x 0.3

= 398

280 + 398

= 678

 

0.567    384
5. Increamental savage value = 210 – 0 = 210 0.567    119
2,139
Total incremental p.v of cash flows

Less incremental initial capital

Increamental N.P.V (negative)

 

(3,555)

(1,417)

 

 

Net contribution = 30% (20%) Sh.12,000,000 = Sh.720,000

 

Additional cost

 

Cost of Financing Receivable

 

New policy  =  75_  x Sh.14,400,000 = Sh.300,000

Debtor            360

 

Increase in debtor level = Sh. 150,000

 

Increased cost of debtor 20% x Sh.160,000   =  Sh.300,000

Sh.420,000

Net gain adopting  New policy.

 

Decision  Change / Adopt New Policy.

 

(b)

 

(i)

 

Price of share

 

= PV (Future Dividends)

Over next 6 years +

PV of share at end of 6th year.

I = 18%

 

 

Year             Growth

Dividend Compounded  

(I + L) –n

 

Present Value

1

2       15%

3

4

5       10%

6

 

2.3

2.645

3.04125

3.345925

3.6805175

4.0485

0.847

0.718

0.609

0.516

0.437

0.370

1.9481

1.899

1.852

1.726

1.608

1.4948

10.5

 

Share price end year 6

 

4.0485 (1.05)4.250  = 32.70

0.18 – 0.05         0.13

 

Present value year 7

 

= Sh.32.70 x 0.370 = Sh.12.10

 

Value to be placed on ordinary share

 

= Sh(12.10 + 10.50) = Sh.22.60

 

No change with length of the indented holding period of 3 years. All that change is the proportions of the present values represented by dividend yields and capital gain

 

Recall DY       =             DPS = DY x MPS

 

Given MPS    =          Sh.45 and DY = 5% (0.05)

DPS     =          Sh.45 x 0.05

=          Sh.2.25

 

Since the company is raising new K determine the amount to raise from each source.

The amount from debentures and Retained Earnings are specified.

The amount to raise from ordinary shares can be derived from the existing capital structure.

 

=          Amount of ordinary share capital x amount to raise

Total capital

 

 

 

 

Amount to raise =

Issue  100 debenture @ 5000

KR 60% x 6m

= 500,000

= 3,600,000

0.5M

3.6M

Issue ord. Shares = 10,463,668 10.464M
Issue preference is = Bal. 2.236M
16.8M

 

The issue price of ordinary shares is the current MPS net of floatation costs.

 

MPS                                        45.00

Fixed cost = 12%x45                5.40

Po-Fc = MPS net of fixed cost           39.60

 

Number of shares to be issued to raise Sh.10.464M from issue of ordinary shares at 39.60 MPS

 

No. of shares   =          =          0.264242M shares

 

=          264,242 shares

 

            Marginal cost of capital

For each of the 4 sources of capital compute the percentage MC.  Ret Earnings are now a source of capital and hence the need to get the cost of Retained Earnings Kr but does not involve any floatation cost.

 

Marginal Cost of debenture (Kd)

No maturity period is given for debenture to be issued thus they are perpetual.

 

 

 

Int       =          10% coupon rate x 1,000 par value = 100

Vd       =          Current MV = 5000

T          =          Corporate tax rate = 30% = 0.3

Fc        =          0 (not given)

 

Kd       =                     =          1.4%

  1. ii) Sharing under ratio
 

Asset proceeds

Less preference claim

 

Less ordinary share capital

Participative claim

Shs.

400,000

(200,000)

200,000

(100,000)

100,000

 

Preference share capital claim =

=  = Shs.33,000

 

Ordinary share capital claim =

 

=           = 16,667%

 

M Cost of Retained Earnings (Kr)

 

Retained Earnings should have been paid out as dividends.  Therefore Kr is the percentage opportunity cost to the shareholders who should have received the dividends.  It is therefore based on dividend paid just like Ke.  However, no floatation costs are involved.  No growth rate is given in the question thus use a zero growth dividend yield model where:

 

 

do         =          DPS = Sh.2.25 (a) above

Po         =          Current MPS = Sh.45

 

=          5%

 

 

Marginal Cost of Ordinary Share Capital (Ke)

 

do         =          Sh.2.25

PoFc     =          Sh.39.60

 

=        5.68%

 

Marginal Cost of Preference Share Capital (Kp)

 

dp         =          Preference DPS = 10% coupon rate x 20 par value = Sh.2

Po         =          Current MPS = Sh.45

Fc         =          0 (not given)

 

= 8.00%

 

Weighted Marginal Cost of Capital (not based on MV)

 

Source Amount to raise % MC
Debenture

Retained Earnings

Ordinary share

Preference share

  0.5M

3.6M

10.464M

 

16.800M

1.40

5.00

5.68

8.00

 

WMCC           =

 

=

=          0.04+ 1.07 + 3.54 + 1.06

=          5.71%

 

WMCC computed is the discounting rate      =          5.71% = 6%

Annual cash flows      3M p.a

Economic life              10 years

Initial capital               16.8M

 

NPV    =          3 x PVAF6%10 – 16.8M

=          3 x 7.36 – 16.8

=          22.08 – 16.80 = 5.28 (positive NPV)

Accept if NPV is positive

Compute the expected DPS at end of each period and discount at 10% rate.  Expected DPS = do (1 + g) n

 

End of year
Expected DPS PVIF10%,n P.V
1

2

3

4

5

6-∞

2.50(1.2)1 = 3.00

2.50(1.2)2 = 3.60

2.50(1.2)3 = 4.32

2.50(1.2)4 = 5.18

2.50(1.2)5 = 6.22

0.909

0.826

0.751

0.683

0.621

2.73

2.97

3.24

3.54

3.86

 

=                 =          221.85             0.621               137.77

 

=          Intrinsic value =          Total present value      =          154.11

 

(a) Ratio Formular 1998 1999 2000
Acid test/

Quick ratio

CA – Stock

CL

      30 + 200__

230 + 200 + 100

 

= 0.43

      20 + 260__

300 + 210 + 100

 

= 0.46

      5 + 290__

380 + 225 + 140

 

= 0.396

 

Av. Debtors collection period
Av. Debtors x 365

CV sales p.a.

  200 x 365

4000

 

= 18.25

  260 x 365

4300

 

= 22.07

  290 x 365

3800

 

= 27.86

 

Inventory Turnover
   Cost of Sales___

Av. Closing stock

3200

400

 

= 8

3600

480

 

= 7.5

3300

600

 

5.5

 

Debt/Equity
Fixed charge capital

Equity

     350__

100 + 500

 

= 0.5

     300__

100 + 550

 

= 0.46

     300__

100 + 550

 

= 0.46

 

Ratio NP margin
  NP   x 100

Sales

300  x 100

4000

 

= 7.5%

 

200     x 100

4300

 

= 4.7%

100     x 100

3800

 

= 2.63%

ROI = ROTA
      NP___

Total Assets

  300 x 100

1430

 

= 20.98%

  200 x 100

1560

 

= 12.82%

  100 x 100

1695

 

= 5.90%

The Baumol Model of cash management is the EOQ model for stock management.  According to EOQ model, the optimal stock to hold (EOQ) =

 

Where: D         = annual demand/requirements           =          21,000 litres

Co       = ordering cost/order              =          Sh.1,400

Ch       = holding/carrying cash p.a.    =          Sh.8

 

 

=          27,110.9 litres

 

Holdings cost  =          ½ x Q x Ch

=          ½ x 27,110.9 x 8

=          108,443.6

 

Ordering cost  =

 

=

 

=          108,443.4

Lastly, all firms must decide whether to operate strictly in their shareholders’ best interests or be responsible to their employers, their customers, and the community in which they operate.  The firm may be involved in activities which do not directly benefit the shareholders, but which will improve the business environment.  This has a long term advantage to the firm and therefore in the long term the shareholders wealth may be maximized.

 

 

References

“00/03020 Coal-Fired Waste Incineration”. Fuel and Energy Abstracts 41.6 (2000): 344. Web.

Gelfand, Lewis E. and Jorge B. Wong. “Waste-To-Energy Incineration”. Energy Engineering 98.1 (2000): 23-46. Web.

Kecman, Pavle and Rob M. P. Goverde. “Predictive Modelling Of Running And Dwell Times In Railway Traffic”. Public Transport 7.3 (2015): 295-319. Web.

“Process Heating, Power And Incineration”. Fuel and Energy Abstracts 42.3 (2001): 221-222. Web.

 

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