| 1. Learning Objectives |
|
|
|
|
|
|
|
| (a) Develop proforma Project Income
Statement Using Excel Spreadsheet |
|
|
|
|
| (b) Compute Net Project Cash
flows, NPV, IRR and PayBack Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1) Life Period of the Equipment = 4 years |
8) Sales for first year (1) |
|
$ 200,000 |
|
| 2) New equipment cost |
|
$ (200,000) |
9) Sales increase per year |
|
4% |
|
| 3) Equipment ship & install cost |
$ (25,000) |
10) Operating cost: |
|
|
$ (120,000) |
|
| 4) Related start up cost |
|
$ (5,000) |
(60 Percent of Sales) |
-60% |
|
|
| 5) Inventory increase |
|
$ 25,000 |
11) Depreciation (Straight Line)/YR |
$ (60,000) |
|
| 6) Accounts Payable increase |
|
$ 5,000 |
12) Tax rate |
|
|
35% |
|
| 7) Equip. Salvage Value Estimated |
$ 15,000 |
13) Cost of Capital (WACC) |
|
10% |
|
| End of Year 4 |
(fully depreciated ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ESTIMATING Initial Outlay (Cash Flow,
CFo, T= 0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| YEAR |
|
|
CF0 |
CF1 |
CF2 |
CF3 |
CF4 |
|
|
|
|
0 |
1 |
2 |
3 |
4 |
|
| Investments: |
|
200,000 |
|
|
|
|
|
| 1) Equipment cost |
|
|
|
|
|
|
|
| 2) Shipping and Install cost |
|
|
|
|
|
|
|
| 3) Start up expenses |
|
|
|
|
|
|
|
| Total Basis Cost
(1+2+3) |
|
|
|
|
|
|
|
| 4) Net Working Capital |
|
|
|
|
|
|
|
| Inventory Inc.- Acct. Payable Inc. |
$ (20,000) |
$ - |
$ - |
$ - |
$ - |
|
|
|
|
|
|
|
|
|
|
| Total Initial
Outlay |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operations: |
|
|
|
|
|
|
|
|
| Revenue |
|
|
|
|
|
|
|
|
| Operating Cost |
|
|
|
|
|
|
|
| Depreciation |
|
|
|
|
|
|
|
|
| EBIT |
|
|
|
|
|
|
|
|
| Taxes |
|
|
|
|
|
|
|
|
| Net Income (LOSS) |
|
|
XXXXXX |
XXXXX |
XXXXX |
XXXXX |
|
| TAX
SHIELD DUE TO LOSS |
|
|
|
|
|
|
| Add back Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Operating Cash
Flow |
|
|
XXXXX |
XXXXX |
XXXXX |
XXXXX |
|
|
|
|
|
|
|
|
|
|
| Terminal (END of 4th YEAR) |
|
|
|
|
|
|
|
| 1) Release of Working Capital |
|
|
$ - |
$ - |
$ - |
$ 20,000 |
|
| 2) Salvage value (after tax) |
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
XXXXXX |
|
|
|
|
|
|
|
|
|
|
| Project Net Cash
Flows |
|
$ - |
$ - |
$ - |
$ - |
$ |
|
|
|
|
|
|
|
|
|
|
| NPV = |
|
|
IRR = |
|
|
Payback= |
|
|
| COST of CAPITAL (WACC) or DISCOUNT RATE OF THE
PROJECT = 10% |
|
|
|
|
| Q#1 |
Would you accept the project based on NPV,
IRR? |
|
|
|
|
|
Would you accept the project based on Payback rule
if project cut-off |
|
|
|
|
period is 3 years? |
|
|
|
|
|
|
| Q#2 SENSITIVITY and SCENARIO
ANALYIS. |
|
|
|
|
|
|
Capital Budgeting (Investment ) Decisions |
|
|
|
|
|
| (a) |
Estimate NPV, IRR and Payback Period of the project
if Marginal |
|
|
|
|
|
Corporate Tax is reduced to 20%. Would
you accept or reject the project? |
|
|
|
|
Assume Straight-Line Depreciation. |
|
|
|
|
|
| (b) |
Estimate NPV, IRR and Payback Period of the project
if Equipment is fully |
|
|
|
|
depreciated in first year and tax
rate is reduced to 20%. Would
you |
|
|
|
|
|
accept or reject the project? |
|
|
|
|
|
| ( c) |
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? |
|
|
|
| Q#5 What are advantages and
disadvantages of using NPV versus IRR? |
|
|
|
|
| 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? |
|
|
|