Can someone please check my tables for accuracy, and tell me if questions 1 - 5 are correct, if something is incorrect please help. thanks

As you know from Project 4, (no you don't know from the new project 4) McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven- year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the captal budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. will need to finance some of the cash to fund $17 million in The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions 1. What will be the tax depreciation each year? Note; the total deprecation of tax purposes will still be $350 million if your calculations are correct 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. (Project 4 eliminated the relatively easy cash flow time line so this will be your first) 3. Should the Project be accepted? The CFO thinks that the likely NPV and IRR will be close to the numbers that you calculated in Project 4. ( this will be your first calculation of NPV and IRR. These two concepts are VERY important in Finance. You must use the NPV and IRR functions in Excel for this question.) The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow 4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2% higher than estimated and the tax rate increases to 50% in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate. 5. What would be the net present value in this "worst case" cash flow? What will be the IRR? (Use the NPV and IRR function) 6. Should the project be accepted? Discuss the risk and the reward to McCormick. (this is to see if you can handle decision making under uncertainty. We don't know what will happen in future. Will taxes be raised or not? Will expenses go up or not? Companies must deal with these questions. If you just look at the worst case, not much will happen. We would have no Apple, Microsoft, Tesla, Google, Facebook, or Amazon if these innovators had just abandoned their ideas because someone came up with a worst case scenario. P. Table 1 MACRS $350 Depreciation 7 Year class 3. Depreciation $50.02 $85.72 $61.22 Year 14.29% 24.49% 17.49% 12.49% 21 6. 3 $43.72 8. $31.26 5 8.93% $31.22 $31.26 10 8.92% 8.93% 11 $15.61 4.46% 12 Table 2 13 B. 14 Cash from Revenue in Cash outflow, Taxable Income Tax in SMillions 27.5% rate After tax Cash Flow In Depreciation in expenses in SMillions Cost of Capital Capital Budgeting in $ Millions $Millions NPV $Millions $Millions 15 Year Instructions Sum: 737.015 Count 31 Average: 29.4806 78% Type here to search R. 4. 00 5. Table 2 B. Cash from Revenue in Cash outflow, expenses in $Millions $1,728 Depreciation in $Millions Taxable Income Tax in $Millions in $ Millions After tax Cash Flow In 5 Year $Millions $1,800 $1,900 $2,000 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 $2,700 $2,600 $2,500 Cost of Capital 27.5% rate NPV $65.95 $78.67 $74.83 $72.92 $Millions $50.02 $85.72 $61.22 $43.72 $31.26 $31.22 $21.99 $6.05 $2.31 $1,824 $1,920 $2,016 $2,112 -$9.72 $18.79 $40.29 $56.75 -$2.67 $2.76 $5.17 $11.08 $15.60 $2.63 $2.56 $72.40 $2.54 $2,208 $2,304 $2,400 $2,496 $2,592 $2,496 6. $60.78 $16.71 $75.29 $2.64 $78.20 $31.26 $64.75 $17.80 $2.74 $23.21 $28.60 $29.70 $28.60 $27.50 $15.61 $84.39 $76.79 $2.69 8. $75.40 $104.00 $2.65 $108.00 $78.30 $2.75 5 10 $75.40 $72.50 $104.00 $2.65 11 $100.00 $2.54 $2,400 Capital Budgeting 12 Instructions Count 31 Sum: 737015 Average: 294806 78% Type here to search 39 2. R. $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 $2,304 $2,112 $1,920 $1,728 $1,440 $1,152 $768 $384 13 $96.00 $88.00 $26.40 $24.20 $22.00 $69.60 $63.80 $58.00 $52.20 $43.50 $34.80 $23.20 $27.60 $2.44 14 $2.24 $2.04 15 $80.00 16 $19.80 $16.50 $13.20 $72.00 $60.00 $48.00 $32.00 $16.00 $1.83 $1.53 17 18 $1.22 $0.81 $0.97 $8.80 $4.40 19 20 36 37 $44.54 Table 3 NPV= A Tax in $Millions 27.5% rate in Taxable Income years 1, 2, 3 and After tax Cash Flow In 50% there after -$3.46 -$12.70 -$5.40 Cash outflow, Cash from Revenue in Depreciation in $Millions expenses in $Millions in $ Millions $Millions NPV 38 Year $Millions $27.27 $40.90 -$12.57 -$46.20 -$19.62 $50.02 $85.72 $1,762.56 $1,860.48 $1,958.40 Cost of Capital Capital Budgeting $1,800 $1,900 39 $52.22 $34.82 40 2. $47.00 $31.33 $61.22 $2,000 41 Instructions Sum: 737015 Average: 294806 Count: 31 8:13 AM 78% 12/10/20 Type here to search N. $43.72 $31.26 $31.22 -$0.02 $7.25 $2,056.32 $43.70 $38.51 $39.53 $40.59 $33.80 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 $2,700 -$0.04 $14.50 $16.62 $18.67 $36.39 $54.08 $56.16 $54.08 $52.00 $49.92 4. $29.13 $2,154.24 $2,252.16 $2,350.08 $2,448.00 $2,545.92 $2,643.84 $2,545.92 $25.67 $8.31 $9.33 $18.20 $27.04 $28.08 $26.35 $27.06 $31.26 $15.61 $0.00 $0.00 $0.00 $22.53 $27.04 $18.03 $28.08 $18.72 10 $27.04 $18.03 $27.04 $2,600 11 $26.00 $17.33 $26.00 $24.96 $22.88 $20.80 $2,500 $2,400 $2,200 $2,000 $1,800 $2,448.00 $2,350.08 $2,154.24 $1,958.40 12 $16.64 $24.96 13 $15.25 $22.88 $45.76 14 $20.80 $13.87 $18.72 $12.48 $10.40 $8.32 $41.60 15 $18.72 $37.44 $1,762.56 16 $15.60 $15.60 $31.20 $1,468.80 $1,175.04 $1,500 $1,200 $800 $400 Cost of Capital -5 6 57 58 17 $12.48 $24.96 $16.64 $8.32 $12.48 18 $5.55 $8.32 $8.32 $783.36 $391.68 Capital Budgeting 19 $4.16 $2.77 $4.16 20 Instructions Sum: 737015 Count: 31 Average: 29 4806 78% Type here to search IT iSn R. 6700 T. NPV= $381.55 Taxable Income After tax Cash Flow In Depreciation in $Millions NPV Expenses $1,800 $1,900 $2,000 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 in $ Millions Year $Millions Revenue Taxes $7.38 $24.26 $4.92 $1,835.25 $1,937.21 $2,039.17 $50.02 $85.72 -$85.27 -$42.64 1. $16.17 -$61.46 -$122.93 $11.03 $7.35 -$100.39 -$50.19 $61.22 $86.14 -$5.91 -$6.91 $57.43 -$42.42 $43.72 -$84.85 $2,141.13 $3.94) ($4.61) ($5.25) -$16.68 ($11.12) -$25.46 ($16.97) -$74.34 -$76.26 -$37.17 $2,243.08 $2,345.04 $2,447.00 $2,548.96 $2,650.92 $31.26 -$38.13 $31.22 6. -$39.13 -$7.87 -$78.26 $31.26 -$64.57 -$32.29 $15.61 8. -$50.92 -$25.46 9. Cost of Capital Capital Budgeting Instructions Sum: 737.015 Average: 294806 Count: 31 78% Type here to search 99 RI P. 2. 3. -$25.46 ($16.97) -$26.44 ($17.63) -$25.46 ($16.97) -$24.48 ($16.32) -$23.50 ($15.67) -$21.54 ($14.36) -$19.58 ($13.06) -$17.63 ($11.75) ($9.79) $2,600 $2,700 -$25.46 -$50.92 $2,650.92 $2,752.88 $2,650.92 $2,548.96 $2,447.00 0. 72 73 74 75 76 77 -$52.88 -$26.44 10 -$25.46 -$24.48 -$50.92 $2,600 11 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 -$48.96 -$47.00 12 -$23.50 13 -$21.54 -$43.08 $2,243.08 14 -$19.58 -$39.17 -$35.25 $2,039.17 $1,835.25 $1,529.38 $1,223.50 $815.67 15 78 -$17.63 0. 16 79 -$14.69 -$14.69 -$11.75 -$7.83 -$3.92 -$29.38 -$23.50 -$15.67 -$7.83 17 80 ($7.83) -$11.75 18 81 ($5.22) -$7.83 $800 19 82 ($2.61) -$3.92 $407.83 $400 83 NPV= ($87.23): 84 9% IRR= 85 86 87 88 Cost of Capital Capital Budgeting Instructions Sum: 737.015 Count 31 Average: 29.4806 8:15 A 77% 12/10/ Type here to search 00 20 As you know from Project 4, (no you don't know from the new project 4) McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven- year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the captal budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. will need to finance some of the cash to fund $17 million in The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions 1. What will be the tax depreciation each year? Note; the total deprecation of tax purposes will still be $350 million if your calculations are correct 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. (Project 4 eliminated the relatively easy cash flow time line so this will be your first) 3. Should the Project be accepted? The CFO thinks that the likely NPV and IRR will be close to the numbers that you calculated in Project 4. ( this will be your first calculation of NPV and IRR. These two concepts are VERY important in Finance. You must use the NPV and IRR functions in Excel for this question.) The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow 4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2% higher than estimated and the tax rate increases to 50% in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate. 5. What would be the net present value in this "worst case" cash flow? What will be the IRR? (Use the NPV and IRR function) 6. Should the project be accepted? Discuss the risk and the reward to McCormick. (this is to see if you can handle decision making under uncertainty. We don't know what will happen in future. Will taxes be raised or not? Will expenses go up or not? Companies must deal with these questions. If you just look at the worst case, not much will happen. We would have no Apple, Microsoft, Tesla, Google, Facebook, or Amazon if these innovators had just abandoned their ideas because someone came up with a worst case scenario. P. Table 1 MACRS $350 Depreciation 7 Year class 3. Depreciation $50.02 $85.72 $61.22 Year 14.29% 24.49% 17.49% 12.49% 21 6. 3 $43.72 8. $31.26 5 8.93% $31.22 $31.26 10 8.92% 8.93% 11 $15.61 4.46% 12 Table 2 13 B. 14 Cash from Revenue in Cash outflow, Taxable Income Tax in SMillions 27.5% rate After tax Cash Flow In Depreciation in expenses in SMillions Cost of Capital Capital Budgeting in $ Millions $Millions NPV $Millions $Millions 15 Year Instructions Sum: 737.015 Count 31 Average: 29.4806 78% Type here to search R. 4. 00 5. Table 2 B. Cash from Revenue in Cash outflow, expenses in $Millions $1,728 Depreciation in $Millions Taxable Income Tax in $Millions in $ Millions After tax Cash Flow In 5 Year $Millions $1,800 $1,900 $2,000 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 $2,700 $2,600 $2,500 Cost of Capital 27.5% rate NPV $65.95 $78.67 $74.83 $72.92 $Millions $50.02 $85.72 $61.22 $43.72 $31.26 $31.22 $21.99 $6.05 $2.31 $1,824 $1,920 $2,016 $2,112 -$9.72 $18.79 $40.29 $56.75 -$2.67 $2.76 $5.17 $11.08 $15.60 $2.63 $2.56 $72.40 $2.54 $2,208 $2,304 $2,400 $2,496 $2,592 $2,496 6. $60.78 $16.71 $75.29 $2.64 $78.20 $31.26 $64.75 $17.80 $2.74 $23.21 $28.60 $29.70 $28.60 $27.50 $15.61 $84.39 $76.79 $2.69 8. $75.40 $104.00 $2.65 $108.00 $78.30 $2.75 5 10 $75.40 $72.50 $104.00 $2.65 11 $100.00 $2.54 $2,400 Capital Budgeting 12 Instructions Count 31 Sum: 737015 Average: 294806 78% Type here to search 39 2. R. $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 $2,304 $2,112 $1,920 $1,728 $1,440 $1,152 $768 $384 13 $96.00 $88.00 $26.40 $24.20 $22.00 $69.60 $63.80 $58.00 $52.20 $43.50 $34.80 $23.20 $27.60 $2.44 14 $2.24 $2.04 15 $80.00 16 $19.80 $16.50 $13.20 $72.00 $60.00 $48.00 $32.00 $16.00 $1.83 $1.53 17 18 $1.22 $0.81 $0.97 $8.80 $4.40 19 20 36 37 $44.54 Table 3 NPV= A Tax in $Millions 27.5% rate in Taxable Income years 1, 2, 3 and After tax Cash Flow In 50% there after -$3.46 -$12.70 -$5.40 Cash outflow, Cash from Revenue in Depreciation in $Millions expenses in $Millions in $ Millions $Millions NPV 38 Year $Millions $27.27 $40.90 -$12.57 -$46.20 -$19.62 $50.02 $85.72 $1,762.56 $1,860.48 $1,958.40 Cost of Capital Capital Budgeting $1,800 $1,900 39 $52.22 $34.82 40 2. $47.00 $31.33 $61.22 $2,000 41 Instructions Sum: 737015 Average: 294806 Count: 31 8:13 AM 78% 12/10/20 Type here to search N. $43.72 $31.26 $31.22 -$0.02 $7.25 $2,056.32 $43.70 $38.51 $39.53 $40.59 $33.80 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 $2,700 -$0.04 $14.50 $16.62 $18.67 $36.39 $54.08 $56.16 $54.08 $52.00 $49.92 4. $29.13 $2,154.24 $2,252.16 $2,350.08 $2,448.00 $2,545.92 $2,643.84 $2,545.92 $25.67 $8.31 $9.33 $18.20 $27.04 $28.08 $26.35 $27.06 $31.26 $15.61 $0.00 $0.00 $0.00 $22.53 $27.04 $18.03 $28.08 $18.72 10 $27.04 $18.03 $27.04 $2,600 11 $26.00 $17.33 $26.00 $24.96 $22.88 $20.80 $2,500 $2,400 $2,200 $2,000 $1,800 $2,448.00 $2,350.08 $2,154.24 $1,958.40 12 $16.64 $24.96 13 $15.25 $22.88 $45.76 14 $20.80 $13.87 $18.72 $12.48 $10.40 $8.32 $41.60 15 $18.72 $37.44 $1,762.56 16 $15.60 $15.60 $31.20 $1,468.80 $1,175.04 $1,500 $1,200 $800 $400 Cost of Capital -5 6 57 58 17 $12.48 $24.96 $16.64 $8.32 $12.48 18 $5.55 $8.32 $8.32 $783.36 $391.68 Capital Budgeting 19 $4.16 $2.77 $4.16 20 Instructions Sum: 737015 Count: 31 Average: 29 4806 78% Type here to search IT iSn R. 6700 T. NPV= $381.55 Taxable Income After tax Cash Flow In Depreciation in $Millions NPV Expenses $1,800 $1,900 $2,000 $2,100 $2,200 $2,300 $2,400 $2,500 $2,600 in $ Millions Year $Millions Revenue Taxes $7.38 $24.26 $4.92 $1,835.25 $1,937.21 $2,039.17 $50.02 $85.72 -$85.27 -$42.64 1. $16.17 -$61.46 -$122.93 $11.03 $7.35 -$100.39 -$50.19 $61.22 $86.14 -$5.91 -$6.91 $57.43 -$42.42 $43.72 -$84.85 $2,141.13 $3.94) ($4.61) ($5.25) -$16.68 ($11.12) -$25.46 ($16.97) -$74.34 -$76.26 -$37.17 $2,243.08 $2,345.04 $2,447.00 $2,548.96 $2,650.92 $31.26 -$38.13 $31.22 6. -$39.13 -$7.87 -$78.26 $31.26 -$64.57 -$32.29 $15.61 8. -$50.92 -$25.46 9. Cost of Capital Capital Budgeting Instructions Sum: 737.015 Average: 294806 Count: 31 78% Type here to search 99 RI P. 2. 3. -$25.46 ($16.97) -$26.44 ($17.63) -$25.46 ($16.97) -$24.48 ($16.32) -$23.50 ($15.67) -$21.54 ($14.36) -$19.58 ($13.06) -$17.63 ($11.75) ($9.79) $2,600 $2,700 -$25.46 -$50.92 $2,650.92 $2,752.88 $2,650.92 $2,548.96 $2,447.00 0. 72 73 74 75 76 77 -$52.88 -$26.44 10 -$25.46 -$24.48 -$50.92 $2,600 11 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 -$48.96 -$47.00 12 -$23.50 13 -$21.54 -$43.08 $2,243.08 14 -$19.58 -$39.17 -$35.25 $2,039.17 $1,835.25 $1,529.38 $1,223.50 $815.67 15 78 -$17.63 0. 16 79 -$14.69 -$14.69 -$11.75 -$7.83 -$3.92 -$29.38 -$23.50 -$15.67 -$7.83 17 80 ($7.83) -$11.75 18 81 ($5.22) -$7.83 $800 19 82 ($2.61) -$3.92 $407.83 $400 83 NPV= ($87.23): 84 9% IRR= 85 86 87 88 Cost of Capital Capital Budgeting Instructions Sum: 737.015 Count 31 Average: 29.4806 8:15 A 77% 12/10/ Type here to search 00 20