1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet 7 (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period $ 200.000 4% (120,000) $ $ 9 10 11 1) Life Period of the Equipment = 4 years 122) New equipment cost *3 3) Equipment ship & install cost 144) Related start up cost 155) Inventory increase 16 6) Accounts Payable increase 177) Equip. Salvage Value Estimated 18 End of Year 4 (fully depreciated) 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T= 0) $ $ $ $ $ $ 8) Sales for first year (1) (200,000) 9) Sales increase per year (25,000) 10) Operating cost: (5,000) (60 Percent of Sales) 25,000 11) Depreciation (Straight Line)/YR 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) -60% $ (60,000) 35% 10% 22 CF3 CF1 CF2 2 CF4 4 $ $ $ XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX S $ $ 20,000 23 YEAR CFO CF1 24 2 1 25 Investments: 26 1) Equipment cost 27 2) Shipping and Install cost 28 3) Start up expenses 29 Total Basis Cost (1+2+3) 204) Net Working Capital 31 Inventory Inc.- Acct. Payable Inc. (20.000 $ 22 33 Total Initial Outlay 34 35 Operations: 36 Revenue 37 Operating Cost 38 Depreciation 39 EBIT 40 Taxes 41 Net Income (LOSS) XXXXXX 42 TAX SHIELD DUE TO LOSS 43 Add back Depreciation 44 45 Total Operating Cash Flow XXXXX 48 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital $ 49 2) Salvage value (after tax) 50 Total 51 52 Project Net Cash Flows $ $ 53 54 NPV = IRR = 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% Would you accept the project based on NPV, IRR? 57 Would you accept the project based on Payback rule if project cut-off 58 period is 3 years? 59 Q2 SENSITIVITY and SCENARIO ANALYIS. 60 Capital Budgeting (Investment ) Decisions 61 (a) Estimate NPV, IRR and Payback period of the project if Marginal 62 Corporate Tax is reduced to 20%. Would you accept or reject the project? 63 Assume Straight-Line Depreciation. 64 (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 66 accept or reject the project? 67 (c) As a CFO of the firm, which of the above two scenario (a) or (b) 68 would you choose? Why? 69 Q#3 How would you explain to your CEO what NPV means? 70 Q#4 What are advantages and disadvantages of using only Payback method? 71 Q#5 What are advantages and disadvantages of using NPV versus IRR? 22 Q#6 Explain the difference between independent projects and mutually exclusive projects. 73 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? XXXXXX $ $ $ Payback 56 Q#1 65 74 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet 7 (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period $ 200.000 4% (120,000) $ $ 9 10 11 1) Life Period of the Equipment = 4 years 122) New equipment cost *3 3) Equipment ship & install cost 144) Related start up cost 155) Inventory increase 16 6) Accounts Payable increase 177) Equip. Salvage Value Estimated 18 End of Year 4 (fully depreciated) 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T= 0) $ $ $ $ $ $ 8) Sales for first year (1) (200,000) 9) Sales increase per year (25,000) 10) Operating cost: (5,000) (60 Percent of Sales) 25,000 11) Depreciation (Straight Line)/YR 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) -60% $ (60,000) 35% 10% 22 CF3 CF1 CF2 2 CF4 4 $ $ $ XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX S $ $ 20,000 23 YEAR CFO CF1 24 2 1 25 Investments: 26 1) Equipment cost 27 2) Shipping and Install cost 28 3) Start up expenses 29 Total Basis Cost (1+2+3) 204) Net Working Capital 31 Inventory Inc.- Acct. Payable Inc. (20.000 $ 22 33 Total Initial Outlay 34 35 Operations: 36 Revenue 37 Operating Cost 38 Depreciation 39 EBIT 40 Taxes 41 Net Income (LOSS) XXXXXX 42 TAX SHIELD DUE TO LOSS 43 Add back Depreciation 44 45 Total Operating Cash Flow XXXXX 48 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital $ 49 2) Salvage value (after tax) 50 Total 51 52 Project Net Cash Flows $ $ 53 54 NPV = IRR = 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% Would you accept the project based on NPV, IRR? 57 Would you accept the project based on Payback rule if project cut-off 58 period is 3 years? 59 Q2 SENSITIVITY and SCENARIO ANALYIS. 60 Capital Budgeting (Investment ) Decisions 61 (a) Estimate NPV, IRR and Payback period of the project if Marginal 62 Corporate Tax is reduced to 20%. Would you accept or reject the project? 63 Assume Straight-Line Depreciation. 64 (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 66 accept or reject the project? 67 (c) As a CFO of the firm, which of the above two scenario (a) or (b) 68 would you choose? Why? 69 Q#3 How would you explain to your CEO what NPV means? 70 Q#4 What are advantages and disadvantages of using only Payback method? 71 Q#5 What are advantages and disadvantages of using NPV versus IRR? 22 Q#6 Explain the difference between independent projects and mutually exclusive projects. 73 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? XXXXXX $ $ $ Payback 56 Q#1 65 74