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 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 Estimatesd End of Year 4 (fully depreciated) 8) Sales for first year(1 200,000 9) Sales increase per year 35,000 10) Operating cost 4,000 (60 Percent of Sales) -60% 25,000 11) Depreciation (Straight LineVYR 5,000 12) Tax rate 60,000 25% 15,000 13) Cost of Capital (WACC) 10% ESTIMATING initial Outlay (Cash Flow, CFo T-a) CF1 CF2 CFO CF3 CF4 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. 20.000 Total Initial Outlay Operating Cost EBIT Taxes Net Income LOSS) AX SHIELD DUE TO LOSS Add back Depreciation XXXXXX XXXOXXXXXXX X00XX Tetal Operating Cash Flow XOX222388 Xsooxx Terminal (END of 4th YEAR) 1) Release of Working Capital 2) Salvage value (after tax) 20,000 IRR Payback COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% Would you accept the project based on NPV,IRR Would you accept the projeet based on Payback rule if project cut-off period is 3 years? Q#1 Q2 SENSITMITY 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 Depreciation 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? As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? b) Q3 How would you explain to your CEO what NPV means? Q4 What are advantages and disadvantages of using only Payback method? s What are advantages and disadvantages of using NPV versus IRR Q6 Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have coficts