1. Learning Obiectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem-Solving and Critical 1) Life Period of the Equipment =4 years 2) New equipment cost 3) Equipment ship \& install cost 4) Related start up cost 5) Inventory increase 6) Accounts Payable increase 7) Equip. Salvage Value Estimated End of Year 4 (fully depreciated) 8) Sales for first year (1) $200,000 ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0 ) YEAR Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Inventory Inc.- Acct. Payable Inc. Total Initial Outlay Qperations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS Add back Depreciation Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off period is 3 years? Q\#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions Estimate NPV, IRR and Payback Period of the project if Marginal Corporate Tax is reduced to 20%. Would you accept or reject the project? Assume Straight-Line (a) Depreciation. Estimate NPV, IRR and Payback Period of the project if Equipment is fullydepreciated in first year and tax rate is reduced to 20%. Would you accept or (b) reject the project? As a CFO of the firm, which of the above two scenario (a) or (b) would you (c) choose? Why? Q\#3 What are advantages and disadvantages of using only Payback method