Learning Objectives 1. Understand how to use Excel spreadsheet (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 5% $ (120,000) -60% 1) Life Period of the Equipment = 4 years 2) New equipment cost $ 3) Equipment ship & install cost $ 4) Related start up cost $ 5) Equip. Salvage Value $ 6) Sales for first year (1) $ 7) Sales increase per year (200,000) 8) Operating cost: (35,000) (60 Percent of Sales) (5,000) 9) Depreciation (Straight Line)/YR 15,000 10) Corporate Marginal Tax Rate 200,000 11) Cost of Capital (WACC) $ (60,000) 21% 10% ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) CFO CF3 CF1 1 CF2 2 CF4 4 Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) $ (240,000) 3) Start up expenses Total Basis Cost (1+2+3) $ (240,000) Total Initial Outlay $ (240,000) 210,000 $ 220,500 $ 231,525 (126,000) $ (132,300) $ (138,915) Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income A la $ $ $ 200,000 $ (120,000) $ (60.000) 20,000 (4,200) 15,800 Add back Depreciation $ 60,000 Total Operating Cash Flow $ 75,800 Terminal: 1) Salvage value (after tax) Total Salvage Value Before Tax (1-T) $ $ 11,850 11,850 Project Net Cash Flows $ (240,000) $ 75,800 $ $ $ 11,850 NPV = ($162,997) IRR = -42.5% 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 How would you explain to your CEO what NPV means? Q#3 What are advantages and disadvantages of using only Payback method? Q#4 What are advantages and disadvantages of using NPV versus IRR? Q#5 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