Question

(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 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: | |||||||

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

**Solution:**

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...

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...

Compute the Payback period, NPV, IRR, and PI and give
accept/reject decision for the following project. The cost of
capital is 10 percent. Assume the policy payback period is 3
years.
Year
Cash Inflow (Outflow)
0
(400)
1
100
2
200
3
200
4
300

Here are the expected cash flows for three projects:
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
you accept?
c. If you use a cutoff...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Blue Hamster Manufacturing Inc. is evaluating a proposed
capital budgeting project (project Beta) that will require an
initial investment of $2,750,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2
$475,000
Year...

Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Cute Camel Woodcraft Company is evaluating a proposed
capital budgeting project (project Beta) that will require an
initial investment of $3,225,000. The project is expected to
generate the following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$450,000
Year...

Gardial Fisheries is considering two mutually exclusive
investments. The projects' expected net cash flows are as
follows:
Expected Net Cash Flows
Time Project A Project B
0 ($375) ($575)
1 ($300) $190
2 ($200) $190
3 ($100) $190
4 $600 $190
5 $600 $190
6 $926 $190
7 ($200) $0
a. If each project's cost of capital is 12%, which project
should be selected? If the cost of capital is 18%, what project is
the proper choice?
@ 12% cost...

A firm is planning a new project that is projected to yield
cash flows of - $595,000 in Year 1, $586,000 per year in Years 2
through 5, and $578,000 in Years 6 through 11. This investment will
cost the company $2,580,000 today (initial outlay). We assume that
the firm's cost of capital is 11%.
1. Compute the projects payback period, net present value
(NPV), profitability index (PI), internal rate of return (IRR), and
modified internal rate of return (MIRR)....

A project has the following total (or net) cash flows.
________________________________________
Year Total (or net)
cash flow
________________________________________
1 $50,000
2 70,000
3 80,000
4 100,000
_______________________________________
The required rate of return on the project is 13 percent. The
initial investment (or initial cost or initial outlay) of the
project is $100,000.
a) Find the (regular) payback period of the project.
b) Compute the discounted payback period of the project.

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