Can You help solve MACRS and the pay back period and depreciation calculation, the small boxes on the right? thank you Capital Budgeting Decisions CASE

Can You help solve MACRS and the pay back period and depreciation calculation, the small boxes on the right? thank you

Capital Budgeting Decisions CASE STUDY FINC 3310 - FALL 2019 MACRS TABLE Learning Objectives

1. Understand how to use EXCEL Spreadsheet (a)Develop proforma Income Statement Using Excel Spreadsheet (b)ComputeNet Project Cashflows, NPV,and IRR

(c) Develop problem-solving andcritical thinking skills and make long-term investment decisions 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 (60% of Sales) $(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 Use 3-yr MACRIS

6) Accounts Payable increase $5,000 12) Marginal Corporate Tax Rate (T) 35%

7) Equip. salvage value before tax $15,000 13) Cost of Capital (Discount Rate) 10% Filling data in the cells colored only. ESTIMATINGInitial Outlay (Cash Flow, CFo, T= 0)

Capital Budgeting Decisions CASE STUDY FINC 3310 - FALL 2019 MACRS TABLE earning Objectives Understand how to use EXCEL Spreadsheet Year Depreciation rate for recovery period Develop proforma Income Statement Using Excel Spreadsheet 3-year 5-year 7-year 10-year 15-year 20-year b) Compute Net Project Cashflows, NPV, and IRR 33.33% 44:45 20.00% 14.29% 10.00% 5.00% .750% 14 81 32.0 24.49 18.00 9.50 7.219 c) Develop problem-solving and critical thinking skills 19.20 17.49 14.40 8.55 7.41 11.52 12.49 11.52 7.70 6.177 and make long-term investment decisions 11.52 8.93 9.22 6.93 5.712 5.76 8.92 7.37 5.285 8.93 5.90 4.888 Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000 4.46 6.55 6.55 6.56 5.90 4.522 ($200,000) 6.55 5.91 4.462 New equipment cost 9) Sales increase per year 5% 5.90 4.461 Equipment ship & install cost ($35,000) 10) Operating cost (60% of Sales) $ (120,000) 3.28 5.91 4.462 Related start up cost $5,000) (as a percent of sales in Year 1) 60% 5.90 5.91 4.461 Inventory increase $25,000 5.90 4.462 11) Depreciation Use 3-yr MACRIS Accounts Payable increase 12) Marginal Corporate Tax Rate (T) 5.91 $5,00 35% Equip. salvage value before tax $15,000 13) Cost of Capital (Discount Rate) 10% 2.95 4.46 4.462 4.461 4.462 Filling data in the cells colored only 4.461 2.231 STIMATING Initial Outlay (Cash Flow, CFo, T= 0) CFO CF1 CF2 CF3 CF4 ear 2 A vestments: Equipment cost (200,000) Shipping and Install cost 35,000) Start up expenses (5,000) Total Basis Cost (1+2+3) (240,000) Net Working Capital (20.000) Total Initial Outlay $ 260,000) Depreciation Calculation perations: evenue SAKA SAKA CA CA 200,000 $ 210,000 $ 220,500 $ 231,525 Depreciation Basis: $ 240,000 perating Cost (120,000) $ KA E (126,000) $ (132,300) SAKAE (138,915) # of years: 4 epreciation Macrs 3 years EBIT 80,000 $ 84,000 $ 88,200 92,610 axes 28.000 $ 29.400 $ 30.870 32.414 B A*B Net Income 52,000 54,600 57,330 60, 197 Year Basis Macrs % Depreciation $0 dd back Depreciation $ $ $ $ $0 $0 Total Operating Cash Flow $ 52,000 $ 54,600 $ 57,330 $ 60, 197 AWN erminal values: Change in net WC Salvage value (after tax) KA EA 20,000 15.000 Total 35,000 Salvage value*(1 - marginal tax rate)Revenue SAKA SAKA CA CA 200,000 $ 210,000 $ 220,500 $ 231,525 Depreciation Basis: $ 240,000 Operating Cost (120,000) $ KA (126,000) $ (132,300) $ KA E (138,915) # of years: Depreciation Macrs 3 years EBIT 80,000 $ 84,000 88,200 92,610 Taxes 28.000 29.400 30.870 32.414 B A*B Net Income 52,000 54,600 $ 57,330 60, 197 Year Basis Macrs % Depreciation $0 Add back Depreciation $ $ $0 $0 Total Operating Cash Flow $ 52,000 $ 54,600 $ 57,330 $ 60, 197 A W N . $0 Terminal values: 1) Change in net WC 20,000 2) Salvage value (after tax) 15.000 Total 35,000 Salvage value*(1 - marginal tax rate) Project Net Cash Flows (260,000) $ 52,000 $ 54,600 57,330 $ 95, 197 NPV = ($59 509 94) IRR = -0 1220% Payback= 0.00 Payback Period Profitability Index = 0.77 Discounted Payback = 0.00 Year Projected CF Cummulative CF Count 0 W N - $ (260,000) $ 260,000) 52,000 $ (208,000) 54,600 $ (153,400) 57,330 $ (96,070) PLEASE RESPOND TO THESE QUESTIONS ON ANOTHER TAB 95, 197 $ (874) Payback period years 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 Discounted Payback Period Capital Budgeting (Investment ) Decisions (a) Estimate NPV, IRR and Payback Period of the project if Year Projected CF Discount factor Discounted CF Cummulative CF Count tax rate equals to 21%. Would you 0 (260,000) accept or reject the project? 52,000 $0 (b) As a CFO of the firm, which of the above two scenario (1) or (2) 54,600 $0 would you choose? Why? 57,330 $0 Q#3 How would you explain to your CEO what NPV means? W N - 95, 197 Payback period years Q#4 What are advantages and disadvantages of using only Payback method? #5 What are advantages and disadvantages of using NPV versus IRR