AutoSave OFF O... Insert Home Draw Page Layout Formulas Data Review View Arial 14 = TV [D ' a. A Paste B TU = = 21 ZA D37 X C Capital Budgeting Decisions PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) INSTRUCTOR: 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet b) Compute Not Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem Solving and Critical Thinking Skills 110) Ute Period of the Equipment 4 years 122) New equipment cont 5 13) Equipment ship & Install cost $ +44) Related start up cost $ 5) Inventory increase 5 6) Accounts Payable increase 5 +7) Equip Salvage Value Estimated $ 1 End of Year 4 fully depreciated) 19 8) Sales for first year (1) 5 200,000 (221,000) 9) Sales increase per year 28% (35000) 10) Operating cost: $(120,000) (5,000) (60 Percent of Sale -60% 25,000 11) Depreciation (Straight Line/YR S (60,000) 5,000 12) Tax rate 35% 15,000 13) Cost of Capital (WACC) 10% CFO 0 CF1 1 CF3 CFC CF2 2 1221000) 135,000 (5,000) (261.000) (20.000) 5 $ 5 $ ESTIMATING Intl Outlay Cash Flow CFT.) 32 YEAR 24 35 mestments 11) Equipment Cost 5 22) Shipping and Instal cost $ 283) Start up expenses $ 20 Total Basis Cost (23) 5 104) Net Working Capta 01 Inventory Inc. - Acct Payable in & Total Initial Outlay $ 14 Operations: 50 Revenge $ Operating cost Depreciation EBIT Taxes 441 Net Income LOSS) + TAX SHELD DUE TO LOSS Add back Depreciation 281.000 221.000 xxxx XOOOOX XXOOX XOOOOX LE Total Operating Cash Flow X0000K Xox Xxx Terminal (END of 4th YLARO 1) Release of Working Capital 2) Salvage Vatertax 50 Total $ 5 $ $ 20.000 XODOCOK Proiect Natashows 5 120.000 5 5 $ 54 NPV IRR COST OF CAPITAL (WACC) O DISCOUNT RATE OF THE PROJECT = 50% Sheet1 Sheet2 Sheet3 Payback D37 A XV fx E F G H B $ $ (20.000) $ $ $ $ $ $ (281,000) $ 221.000 304) Net Working Capital 31 Inventory Inc.- Acct. Payable Inc. 32 33 Total Initial Outlay 34 ss Operations: 36 Revenue 37 Operating cost 38 Depreciation 39 EBIT 40 Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS 43 Add back Depreciation 44 45 Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX 41 42 Xxxxx XXXXX Xxxxx XXXXX 46 $ $ $ 20,000 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital 49 2) Salvage value (after tax) Total XXXXXX 50 51 $ 52 53 54 NPV = 57 58 59 Q#2 60 Project Net Cash Flows $ (281,000 $ $ $ IRR = Payback 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 56 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? SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions 61 (a) Estimate NPV, IRR and Payback period of the project ir Marginal Corporate Tax is reduced to 20%. Would you accept or reject the project? 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 accept or reject the project? 67 (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 69 70 Q#3 What are advantages and disadvantages of using only Payback method? 62 63 65 66 68 71 72 73 74 75 AutoSave OFF O... Insert Home Draw Page Layout Formulas Data Review View Arial 14 = TV [D ' a. A Paste B TU = = 21 ZA D37 X C Capital Budgeting Decisions PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) INSTRUCTOR: 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet b) Compute Not Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem Solving and Critical Thinking Skills 110) Ute Period of the Equipment 4 years 122) New equipment cont 5 13) Equipment ship & Install cost $ +44) Related start up cost $ 5) Inventory increase 5 6) Accounts Payable increase 5 +7) Equip Salvage Value Estimated $ 1 End of Year 4 fully depreciated) 19 8) Sales for first year (1) 5 200,000 (221,000) 9) Sales increase per year 28% (35000) 10) Operating cost: $(120,000) (5,000) (60 Percent of Sale -60% 25,000 11) Depreciation (Straight Line/YR S (60,000) 5,000 12) Tax rate 35% 15,000 13) Cost of Capital (WACC) 10% CFO 0 CF1 1 CF3 CFC CF2 2 1221000) 135,000 (5,000) (261.000) (20.000) 5 $ 5 $ ESTIMATING Intl Outlay Cash Flow CFT.) 32 YEAR 24 35 mestments 11) Equipment Cost 5 22) Shipping and Instal cost $ 283) Start up expenses $ 20 Total Basis Cost (23) 5 104) Net Working Capta 01 Inventory Inc. - Acct Payable in & Total Initial Outlay $ 14 Operations: 50 Revenge $ Operating cost Depreciation EBIT Taxes 441 Net Income LOSS) + TAX SHELD DUE TO LOSS Add back Depreciation 281.000 221.000 xxxx XOOOOX XXOOX XOOOOX LE Total Operating Cash Flow X0000K Xox Xxx Terminal (END of 4th YLARO 1) Release of Working Capital 2) Salvage Vatertax 50 Total $ 5 $ $ 20.000 XODOCOK Proiect Natashows 5 120.000 5 5 $ 54 NPV IRR COST OF CAPITAL (WACC) O DISCOUNT RATE OF THE PROJECT = 50% Sheet1 Sheet2 Sheet3 Payback D37 A XV fx E F G H B $ $ (20.000) $ $ $ $ $ $ (281,000) $ 221.000 304) Net Working Capital 31 Inventory Inc.- Acct. Payable Inc. 32 33 Total Initial Outlay 34 ss Operations: 36 Revenue 37 Operating cost 38 Depreciation 39 EBIT 40 Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS 43 Add back Depreciation 44 45 Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX 41 42 Xxxxx XXXXX Xxxxx XXXXX 46 $ $ $ 20,000 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital 49 2) Salvage value (after tax) Total XXXXXX 50 51 $ 52 53 54 NPV = 57 58 59 Q#2 60 Project Net Cash Flows $ (281,000 $ $ $ IRR = Payback 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 56 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? SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions 61 (a) Estimate NPV, IRR and Payback period of the project ir Marginal Corporate Tax is reduced to 20%. Would you accept or reject the project? 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 accept or reject the project? 67 (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 69 70 Q#3 What are advantages and disadvantages of using only Payback method? 62 63 65 66 68 71 72 73 74 75