1. Learning Objectives (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 Thinking Skills 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. CF0 0 CF1 CF3 3 CF4 4 $(20,000)$$$$ Total Initial Outlay Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) XXXXXX XXXXX XXXXX XXXXX TAX SHIELD DUE TO LOSS Add back Depreciation Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX Terminal (END of 4th YEAR) 1) Release of Working Capital $$$$20,000 2) Salvage value (after tax) Total XXXXXX Project Net Cash Flows NPV = IRR= Payback= COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT =10% Q\#1 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 (a) 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 Depreciation. (b) Estimate NPV, IRR and Payback Period of the project if Equipment is fully depreciated in first year and tax rate is reduced to 20%. Would you accept or reject the project? (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q\#3 What are advantages and disadvantages of using only Payback method