1. undersatnd how to use EXCEL Spreadsheet

(a) Develop proforma Income Statement Using Excel Spreadsheet

(b) Compute Net Project Cashflows, NPV, and IRR

(c) Develop problem-solving and critical thinking skills

and make long-term investment decisions

1) Life Period of the Equipment = 4 years

2) New equipment cost $(200,000)

3) Equipment ship & install cost $(35,000)

4) Related start up cost $(5,000)

5) Inventory increase $25,000

6) Accounts Payable increase $5,000

7) Equip. salvage value before tax $15,000

8) Sales for first year (1) $200,000

9) Sales increase per year 5%

10) Operating cost (60% of Sales) $(120,000

( As a percnt of sales in year 1) -60 percent

11) Depreciation (Straight Line)/YR $(60,000 )

12) Marginal Corporate Tax Rate (T) 21%

13) Cost of Capital (Discount Rate) 10%

ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0)

CF0 CF1 CF2 CF3 CF4

Year 0 1 2 3 4

Investments:

1) Equipment cost

2) Shipping and Install cost

3) Start up expenses

Total Basis Cost (1+2+3)

4) Net Working Capital

Total Initial Outlay

Operations:

Revenue

Operating Cost

Depreciation

EBIT

Taxes

Net Income

Add back Depreciation

Total Operating Cash Flow

XXXXX XXXXX XXXXX XXXXX Terminal:

1) Change in net WC $- $- $- $20,000

2) Salvage value (after tax)

- Salvage Value Before Tax (1-T) xxxxx/xxxxx Totall

Project Net Cash Flows $- $- $- $- $

NPV = IRR = Payback=

Q#1 Would you accept the project based on NPV, IRR?

Would you accept the project based on Payback rule if project cut-off

is 3 years?

Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and

Capital Budgeting (Investment ) Decisions

(a) Estimate NPV, IRR and Payback Period of the project if equipment is fully

depreciated in first year and tax rate equals to 21%. Would you

accept or reject the project?

( b) As a CFO of the firm, which of the above two scenario (a) or (b)

would you choose? Why?

Q#3 How would you explain to your CEO what NPV means?

Q#4 What are advantages and disadvantages of using only Payback method?

Q#5 What are advantages and disadvantages of using NPV versus IRR?

Q#6 Explain the difference between independent projects and mutually exclusive projects.

When you are confronted with Mutually Exclusive Projects and have conflicts

with NPV and IRR results, which criterion would you use (NPV or IRR) and why?