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) (as a percent of sales in Year 1) 60 5) Inventory increase $ 25,000 11) Depreciation (Straight Line) YR $ (60,000) 6) Accounts Payable increase $ 5,000 12) Tax rate 21 7) Equip salvage value after tax $ 15,000 13) WACC 10 ESTIMATING CASH FLOW and MAKING CAPITAL BUDGETING DECISION Year 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 Total Initial Outlay xxxxx Operations Revenue Operating Cost Depreciation EBIT Taxes Net Income Add back Depreciation Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX Terminal 1) Change in net WC $ $ $ $ 20,000 2) Salvage value (after tax) Salvage Value Before Tax(1 T) XXXXX Total XXXXX Project Net Cash Flows $ $ $ $ $ NPV IRR Payback Q 1 Would you accept the project based on NPV, IRR Would you accept the project based on Payback rule if project cut off is 3 years Q 2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment) Decisions A) Estimate NPV, IRR and Payback Period of the project if equipment is fully depreciated in the first year and tax rate equals 21 Would you accept or reject the project B) As CEO 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 (in business terms) what NPV means Q 4 What are the advantages and disadvantages of using only Payback method Q 5 What are the 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 conflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why

Question

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) (as a percent of sales in Year 1)  60  5) Inventory increase $ 25,000 11) Depreciation (Straight Line) YR $ (60,000) 6) Accounts Payable increase $ 5,000 12) Tax rate 21  7) Equip  salvage value after tax $ 15,000 13) WACC 10  ESTIMATING CASH FLOW and MAKING CAPITAL BUDGETING DECISION Year 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 Total Initial Outlay xxxxx Operations  Revenue Operating Cost Depreciation EBIT Taxes Net Income Add back Depreciation Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX Terminal  1) Change in net WC $   $   $   $ 20,000 2) Salvage value (after tax) Salvage Value Before Tax(1 T) XXXXX Total XXXXX Project Net Cash Flows $   $   $   $   $ NPV   IRR   Payback  Q 1 Would you accept the project based on NPV, IRR  Would you accept the project based on Payback rule if project cut off is 3 years  Q 2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment) Decisions A) Estimate NPV, IRR and Payback Period of the project if equipment is fully depreciated in the first year and tax rate equals 21   Would you accept or reject the project  B) As CEO 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 (in business terms) what NPV means  Q 4 What are the advantages and disadvantages of using only Payback method  Q 5 What are the 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 conflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why

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1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000 2) New equipment cost $ (200,000) 9) Sales

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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)		(as a percent of sales in Year 1)			-60%
5) Inventory increase	$ 25,000		11) Depreciation (Straight Line)/YR			$ (60,000)
6) Accounts Payable increase	$ 5,000		12) Tax rate			21%
7) Equip. salvage value after tax	$ 15,000		13) WACC			10%



ESTIMATING CASH FLOW and MAKING CAPITAL BUDGETING DECISION

Year	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
Total Initial Outlay	xxxxx

Operations:
Revenue
Operating Cost
Depreciation
EBIT
Taxes
Net Income

Add back Depreciation

Total Operating Cash Flow		XXXXX	XXXXX	XXXXX	XXXXX

Terminal:
1) Change in net WC		$ -	$ -	$ -	$ 20,000
2) Salvage value (after tax)	Salvage Value	Before	Tax(1-T)		XXXXX
Total					XXXXX

Project Net Cash Flows	$ -	$ -	$ -	$ -	$

NPV =	IRR =			Payback=