A C D F F H Learning Objectives 1.Understand 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 3 3) Equipment ship & Install cost 4 4) Related start up cost 5 5) Inventory increase 6 6) Accounts Payable increase 17 7) Equip. salvage value before tax 8) Sales for first year (1) 200,000 $ (200,000) 9) Sales increase per year (35,000) 10) Operating cost (60 % of Sales) (5,000) $ 5% (120,000) 60 % (60,000) 21% (as a percent of sales in Year 1) 25,000 11) Depreciation (Straight Line)/YR 5,000 12) Marginal Corporate Tax Rate (T) 15,000 13) Cost of Capital (Discount Rate) 10% 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFo, T- 0) 22 CF1 1 CF4 CF2 CF3 3 CFO 23 24 Year 25 Investments: 26 1) Equipment cost 27 2) Shipping and Install cost 28 3) Start up expenses Total Basis Cost (1+2+3) 30 4) Net Working Capital Total Initial Outlay 29 31 32 33 Operations: 34 Revenue 35 Operating Cost 36 Depreciation EBIT 37 38 Taxes Net Income 40 Sheet3 Sheet2 Sheet1 Ready Cut 10 Sa Wrap Text Arial Av Ger Copy A Paste U Merge & Center Format 022 E H Net Income 39 40 41 Add back Depreciation 42 Total Operating Cash Flow 43 XXXXX XXXXX XXXXX XXXXX 4 45 Terminal: 1) Change in net WC 2) Salvage value (after tax) S 20,000 XXXXX Salvage Value Before Tax (1-T) Total 48 XXXXX 40 Project Net Cash Flows $ S 51 52 NPV IRR Payback 83 54 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? Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment) Decisions 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? As a CFO of the firm, which of the above two scenario (a) or (b) Q#2 59 (a) b would you choose? Why? 64 QW3 How would you explain to your CEO what NPV means? es Q4 What are advantages and disadvantages of using only Payback method? Q#S What are advantages and disadvantages of using NPV versus IRR? 7Q#6 Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have coflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? 71 74 74 Sheett Sheet3 Sheet2 Ready esc e Ch 4h 2 88S &952 8 88RERREE