Read-Only GROUP 9-FINC 3310 Capital Budgeting Project C 1.Learning Objectives (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 1) Life Period of the Equipment- 4 years 2) New equipment cost 3) Equipment ship&install cost(35,000) 10) Operating cost: 4) Related start up cost 5) Inventory increase 6) Accounts Payable increase 7) Equip. Salvage Value Estimated 15,000 13) Cost of Capital (WACc) End of Year (fully depreciated) 8) Sales for first year (1) 9) Sales increase per year $ 200,000 $ (120,00) $(60,750) $ (200,000) 6.80% $(8,000) (60 Percent of Sales) -60% 25,000 5,000 11) Depreciation (Straight Line)YR 12) Tax rate 35% 9% ESTIMATING Initial Outlay (Cash Flow, CFo, T0 YEAR CFO CF1 CF2 CF3 CF4 Investments 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses s (200,000) s (35,000) S (8,000) s (243,000) Total Basis Cost (1+2+3) 4) Net Working Capital Inventory Inc.-Acct. Payable Inc. S(20,000) $ S S (263,000 Total Initial Outlay SheetiSheet2 Sheet3 ) W CUNY Login Excel Online 21 ESTIMATING Initial Outlay (Cash Flow, CFo, T- 23 YEAR CFO CF1 CF2 CF3 CF4 26 1) Equipment cost 22) Shipping and Install cost 3) Start up expenses 29 Total Basis Cost (1+2+3) 0 4) Net Working Capital i| Inventory Inc.. Act. PayableInc. $ (200,000) $(35,000) $(8,000) $ (243,000) S120000) s $ (263,000) Total Initial Outlay as Operations: 36 Revenue 7 Operating Cost s Depreciation 9 EBIT 0 Taxes 41 Net Income (LOSS) 42 TAX SHIELD DUE TO LOSS $200,000 ALUE! $(120,000) #VALUE! s (60-750)(60zso $ 19,250VALUE! $ (6,738) #VALUE! $ 12,513 VALUE ALUE! VALUE VALUE ALUE! s s (60.750) (60.750) VALUE #VALUE! VALUE $60,750 S 60,750 $ 60,750 60,750 Add back Depreciation VALUE 73.263 #VALUE! Total Operating Cash Flow Terminal (END of 4th YEAR) s 1) Release of Working Capital 2) Salvage value (after tax) 20,000 9.750 19 Sheet1 Sheet2 Sheet I Aa MacBoo Read-Only 47 Terminal (END of 4th YEAR) 4s 1) Release of Working Capital 49 2) Salvage value (after tax) o Total 51 52 Project Net Cash Flows 20,000 29,750 $ (263,000) $ 73,263 rVALUE #VALUEI VALUE #VALUEI aNPV(H17,E52:H52)+D52 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off IRR # #VALUE! -imp52:H52) Payback ss COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT-9% 56 Q#1 57 Answer 58 59 60 Answer 61 62 63 (a) period is 3 years? SENSITIVITY and SCENARIO ANALYS. Q#2 Capital Budgeting (Investment) Decisions Estimate NPV, IRR and Payback Period of the project if Marginal Corporate Tax is reduced to 20%. Would you acopt or reject the project? 65 66 Answer Estmate NPV, IRR and Payback Period of the project f Equipment is fully depreciated in first year and tax rate isreduced to 20%, would you accept or reject the project? c8 (b) 69 70 1 Answer As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? n (c) s Answer Sheet) Sheet2 Sheeti 2 ) w