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 Capital Budgeting Decisions (Scenario 1) 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 before tax $ 8) Sales for first year (1) (200,000) 9) Sales increase per year (35,000) 10) Operating cost (60% of Sales) (5,000) (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) 200,000 5% (120,000) -60% (60,000) 21% 10% $ Year Operations: I/S Revenue Operating Cost Depreciation EBIT Taxes Net Income $ $ $ $ $ $ 200,000 (120,000) (60,000) 20,000 4,200 15,800 Add back Depreciation $ 60,000 Total Operating Cash Flow $ 75,800 $ . ESTIMATING Initial Outlay (Cash Flow, CFO, T= 0) Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Increase in CA - Increase in CL Total Initial Outlay $ (200,000) $ (35,000) $ (5,000) $ (240,000) $ (20,000) $ (260,000) - $ - $ Terminal: 1) Change in net WC 2) Salvage value (after tax) Total - S Salvage Value Before Tax (1-T) 20,000 XXXXX XXXXX Project Net Cash Flows $ (260,000) $ 75,800 $ - $ - $ NPV = IRR = Payback= Q#1 (a) Would you accept the project based on NPV and IRR? (b) Would you accept the project based on Payback rule if the project cut-off is 3 years? Q#2 How would you explain to your CEO what NPV means? Q#3 What are the advantages and disadvantages of using the Payback method only? Q#4 What are the 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 conflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? 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 Capital Budgeting Decisions (Scenario 1) 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 before tax $ 8) Sales for first year (1) (200,000) 9) Sales increase per year (35,000) 10) Operating cost (60% of Sales) (5,000) (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) 200,000 5% (120,000) -60% (60,000) 21% 10% $ Year Operations: I/S Revenue Operating Cost Depreciation EBIT Taxes Net Income $ $ $ $ $ $ 200,000 (120,000) (60,000) 20,000 4,200 15,800 Add back Depreciation $ 60,000 Total Operating Cash Flow $ 75,800 $ . ESTIMATING Initial Outlay (Cash Flow, CFO, T= 0) Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Increase in CA - Increase in CL Total Initial Outlay $ (200,000) $ (35,000) $ (5,000) $ (240,000) $ (20,000) $ (260,000) - $ - $ Terminal: 1) Change in net WC 2) Salvage value (after tax) Total - S Salvage Value Before Tax (1-T) 20,000 XXXXX XXXXX Project Net Cash Flows $ (260,000) $ 75,800 $ - $ - $ NPV = IRR = Payback= Q#1 (a) Would you accept the project based on NPV and IRR? (b) Would you accept the project based on Payback rule if the project cut-off is 3 years? Q#2 How would you explain to your CEO what NPV means? Q#3 What are the advantages and disadvantages of using the Payback method only? Q#4 What are the 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 conflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why