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 ESTIMATING Initial Outlay (Cash Flow, CFo, T=0 ) YEAR 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. Total Initial Outlay Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) \begin{tabular}{llll} XXXXXX & XXXXX & \\ \hlineXXXX & XXXXX \end{tabular} TAX SHIELD DUE TO LOSS $(20,000)$ $ $$ Add back Depreciation \begin{tabular}{llll} Total Operating Cash Flow & XXXXX & XXXXX & XXXXX \\ \hline \end{tabular} Terminal (END of 4th YEAR) 1) Release of Working Capital 2) Salvage value (after tax) Total $$$$$20,000 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 What are advantages and disadvantages of using only Payback method