Learning Objectives s 1. Understand how to us readsheet (a) Develop pro-forma 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 11 1) Life Period of the Equipment- 4 years s 200,000 5% 8) Sales for first year (1) 2) New equipment cost $(200,000) 9) Sales increase per year 12 14 4) Related start up cost 5) Inventory increase S s 6) Accounts Payable increase$ 7) Equip, salvage value before tax $ (5,000) 25,000 6,000 15,000 (as a percent of sales in Year 1) 11) Depreciation (Straight LineVYR 12) Marginal Corporate Tax Rate (T 13) Cost of Capital (Discount Rate) -60% (60,000) 21% 10% $ Income Statement 1 Revenue Operating Cost Depreciation 24 EBIT 25 Taxes 26 Net Income CFo CF1 CF2 CF3 CF4 29 Year 1) Operating Cash Flow a 2) Change in NWC s 3) Capital spending Home InsertPage Layout Pronected iew-Exce o Income Statement 21 Revenue 22 Operating Cost 23 Depreciation 24 EBIT 25 Taxes 26 Net Income CFO CF1 CF2 CF3 CF4 11) Operating Cash Flow 32) Change in NWC s 3) Capital spending Total Project Net Cash Flows NPV IRR = Q#1 would you accept the project based on NPV, IRR? Q#2 Would you accept the project based on Payback rule if project cut-o" is 3 years? Q#3 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 depreclated in first year and tax (b) As a CFO of the firm, which of the above two scenarios (o) and (b) would you choose? Why? (a) and (b) would you choose? Wh