Question

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? |

Answer #1

SI No |
Item |
IN $ |
Years |
|||

1styear |
2nd |
3rd |
4th |
|||

A | INVESTMENTS | |||||

1.00 | Equipment cost | 200000.00 | 0.00 | 0.00 | 0.00 | |

2.00 | Shipping and Install cost | 35000.00 | 0.00 | 0.00 | 0.00 | |

3.00 | Start up expenses | 5000.00 | 0.00 | 0.00 | 0.00 | |

Total Basis Cost (1+2+3) | 240000.00 | 0.00 | 0.00 | 0.00 | ||

Net working capital | 20000.00 | |||||

Total initial outlay | 500000.00 | |||||

b | Operations | |||||

1.00 | Revenue | 200000.00 | 210000.00 | 220500.00 | 231525.00 | |

2.00 | operating cost | 120000.00 | 126000.00 | 132300.00 | 138915.00 | |

3.00 | depreciation | 60000.00 | 60000.00 | 60000.00 | 60000.00 | |

EBIT | -480000.00 | 24000.00 | 28200.00 | 32610.00 | ||

taxes | 8400.00 | 9870.00 | 11413.50 | |||

Add back depreciation | 60000.00 | |||||

total operating cashflows |
-420000.00 |
15600.00 |
18330.00 |
21196.50 |
||

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...

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...

(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
8) Sales for first year (1)
$ 200,000
2) New equipment cost
$ (200,000)
9) Sales increase per year
5%
3) Equipment ship &
install cost
$ (35,000)
10) Operating cost:
$ (120,000)
4) Related start up cost
$ (5,000)
(60 Percent of...

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Year
Cash Inflow (Outflow)
0
(400)
1
100
2
200
3
200
4
300

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Project Year 0 1 2 3
4
A -5,400 +1,100 +1,100
+3,200 0
B -1,400 0 +1,400
+2,200 +3,200
C -5,400 +1,100 +1,100
+3,200 +5,200
a. what is the payback period on each of the projects?
b. If you use a cutoff period of 2 years, which projects would
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following cash flows steam:
Year
0
1
2
3
4
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Year
0
1
2
3
4
A
Cash flows
-$100
$35
$35
$35
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B
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(Payback period, NPV, PI, and IRR calculations) You are
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