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H56 A B D H 4 E 1 Capital Budgeting Decisions 2 3 Learning Objectives 5 1. Understand how to use EXCEL Spreadsheet 6 (a) Develop proforma Income Statement Using Excel Spreadsheet 7 (b) Compute Net Project Cashflows, NPV, and IRR . (c) Develop problem-solving and critical thinking skills and make long-term investment decisions 11 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 12 2) New equipment cost $ (200,000) 9) Sales increase per year 13 3) Equipment ship & Install cost $ (35,000) 10) Operating cost (60% of Sales) 14 4) Related start up cost (5,000) (as a percent of sales in Year 1) 15 5) Inventory Increase 25,000 11) Depreciation (Straight Line)/YR 16 6) Accounts Payable increase 5,000 12) Marginal Corporate Tax Rate (T) 177) Equip. salvage value before tax 15,000 13) Cost of Capital (Discount Rate) OG (OCF=TE 9 10 $ $ $ $ $ $ 200,000 5% (120,000) -60% (60,000) 21% 10% $ 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T-0) 22 6 23 24 Year 25 Investments: Sheet1 CFO 9 CF1 1 CF3 CF2 2 CF4 Sheet2 Sheet3 Type here to search AutoSave of 28- $ - Capital Budgeting - Compatibility Mode - Excel e Search File Home Insert Draw Page Layout Formulas Data Review View Developer Help H56 fi E F G 6 CF2 CF1 1 2 CF3 3 CF4 4 29 A B D 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 CFO 24 Year 0 25 Investments: 26 1) Equipment cost $ (200,000) 27 2) Shipping and Install cost $ (35,000) 28 3) Start up expenses $ (5,000) Total Basis Cost (1+2+3) $ (240.000) 304) Net Working Capital $120,000 31 Total Initial Outlay $ 260,000 32 33 Operations: 34 Revenue 35 Operating Cost 36 Depreciation EBIT 38 Taxes Net Income 40 41 Add back Depreciation +the TH 60% 37 200,000 $ 210,000 $ 220,500 237,325 (120,000) S (126,000) $(132,300) $ (138,915) (60,000) $ (60,000) $ (60,000) $ (60.000) 20,000 $ 24,000 $ 28,200 $ 32,610 4,200 $ 5,040 $ 5.922 $ 6.848 15,800 $ 18,960 $ 22,278 $ 25,762 39 $ 60.000 $ 60,000 $60,000 $ 42 60,000 $ Total Operating Cash Flow Sheet1 Sheet2 Sheet3 75 800 $ 78,960 $ 82,278 $ 85,762 H62 fx B E F G H 42 43 Total Operating Cash Flow $ 75,800 $ 78.960 $ 82.278 S 85,762 48 49 50 45 Terminal: 46 1) Change in net WC $ $ $ $ 20,600 47 2) Salvage value (after tax) Salvage Value Before Tax (1-T) $ 11,850 Total $ 117,612 $ (184,200) S (105,240) $ (22,962) Project Net Cash Flows $ (260,000) $ 75,800 $ 78,960 $ 82,278 '$ 117,612 51 52 NPV = $16,312 IRR = 12.7% Payback= 3.20 53 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? 57 Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions 59 (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? 62 (b) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 55 56 58 50 61 63 64 65