Media Colab D G $ Sheet Sheet2 Sheets B 11 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 122) New equipment cost $ (200,000) 9) Sales increase per year 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) 5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR 16 6) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 17 7) Equip. salvage value before tax 15,000 13) Cost of Capital (Discount Rate) $ 15 200,000 5% (120,000) -60% (60,000) 21% 10% $ $ 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 23 CFO 24 Year CF1 1 CF2 2 CF3 3 CF4 4 29 .ee 26 Investments: 26 1) Equipment cost 27 2) Shipping and Install cost e 22 3) Start up expenses eri Total Basis Cost (1+2+3) act 30 4) Net Working Capital O 31 Total Initial Outlay 32 Operations: IRR 34 Revenue Wou Operating Cost Pay! 6 Depreciation ANS EBIT See 36 Taxes Net Income 37 30 ans SUM 40,003,70 AVERAGE 4.444.502222 MIN $120,000.00 MAX 1200.000.00 14 C. D H III Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX 44 45 Terminal: 48 1) Change in net WC 47 2) Salvage value (after tax) Total $ $ $ $ Salvage Value Before Tax (1-T) 20,000 XXXXX XXXXX 48 - 58 60 61 50 Project Net Cash Flows $ $ $ $ $ 51 32. NPV = IRR = Payback 53 54 Q#1 Would you accept the project based on NPV, IRR? 55 Would you accept the project based on Payback rule if project cut-off 58 is 3 years? 07 Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions te (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? As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? - Q#3 How would you explain to your CEO what NPV means? Q#4 What are advantages and disadvantages of using only Payback method? 06 Q#5 What are advantages and disadvantages of using NPV versus IRR? 07 Q#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? Equipmer 02 (b) 69 OR 05 Showtrans BB (a) Develo 69 Periodo WADOGO