Assignment Learning Objectives:

(a) Develop a proforma project income statement using an Excel spreadsheet

(b) Compute net project cash flows, NPV, IRR and Payback period

(c) Perform sensitivity and scenario analyses

(d) Develop problem-solving and critical thinking skills

Assignment Instructions:

There are 3 parts to this assignment, which combines using Excel to perform calculations and answering the eight questions on the "Additional Questions" tab. The use of formulas and cell references (rather than hard typing in numbers) should be used in all cases where they can. To guide you, the cells shaded gray are where formulas, numerical inputs or calcuations are needed in order to complete the assignment.

PART 1B Questions: Capital Budgeting Decisions

In this assignment, you are evaluating a potential capital investment project that has a 4 year life. The financial details are as follows:
1) Useful life of the equipment (years)		4
2) New equipment cost		$ 240,000
5) Inventory increase		$ 25,000
6) Accounts payable increase		$ 5,000
7) Equipment salvage value (end of life)		$ 15,000
8) Projected sales for year 1		$ 200,000
9) Projected sales growth per year
Low Case		2%
Base Case		5%
High Case		8%
10) Operating cost (as a % of sales)	60%
11) Depreciation (straight line) per year
12) Corporate marginal tax rate (T)		21%
13) Cost of capital or discount rate (r)		10%

Question 1:

Using 10% as your company's cost of capital and assuming the BASE CASE for revenue growth, would you accept the project on an NPV and IRR? Why?

Question 2:

Would you accept the project based on the Payback rule if the project cut-off is 3 years?

Answer 1:

Answer 2:

PART 2B Questions: Scenario Analysis

Question 3:

Would you accept the project based on this scenario?

Question 4:

As the firm's CFO, explain the differences between the two depreciation alternatives and how they impact your NPV, IRR and Payback calculations.

Answer 3:

Answer 4:

PART 3B Questions: Sensitivity Analysis

Question 5:

As the firm's CFO, how would you explain the sensitivity analysis on revenue growth? What insights do you see?

Answer 5:

Additional Questions

Question 6:

How would you describne the profit margin trend in Part 1A and how would you compare it to the margin trend in the revised pro forma financials in Part 1B?

Question 7:

How would you explain to your CEO what IRR and NPV means? What are some strengths and weaknesses of each approach?

Question 8:

How would you explain to your CEO what Payback Period means? What are some strengths and weaknesses of this approach?

Answer 6:

Answer 7:

Answer 8: