Capital Budgeting Decisions CASE STUDYMACRS TABLELearning 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 skillsand make long-term investment decisions1) Life Period of the Equipment = 4 years8) Sales for first year (1)$200,0002) New equipment cost($200,000)9) Sales increase per year5%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$25,00011) DepreciationUse 3-yr MACRIS6) Accounts Payable increase$5,00012) Marginal Corporate Tax Rate (T)35%7) Equip. salvage value before tax$15,00013) Cost of Capital (Discount Rate)10%Filling data in the cells coloredonly.Do not write in any other cell.Do not delete any row or columnESTIMATINGInitial Outlay (Cash Flow, CFo, T= 0)-70CF0CF1CF2CF3CF4Year01234Investments:1) Equipment cost2) Shipping and Install costEBIT = Sales - Costs - D3) Start up expensesTotal Basis Cost (1+2+3)$-4)Net Working CapitalTotal Initial Outlay$-Depreciation CalculationOperations:SalesDepreciation Basis:$-Operating Costnegative$-$-# of years:4Depreciation$-$-$-$-Macrs3yearsEBIT$-$-$-$-Taxes$-$-$-$-ABA*BNet Income$-$-$-$-YearBasisMacrs %Depreciation1$0Add backDepreciation$-$-$-$-2$03$0Total Operating Cash Flow$-$-$-$-4$00%0Terminal values:1) Change in net WC2) Salvage value (after tax)

Total$-Salvage value*(1 - marginal tax rate)Project Net Cash Flows$-$-$-$-$-NPV =$0.00IRR =#NUM!Payback=0.00Payback PeriodProfitability Index=#DIV/0!Discounted Payback =0.00YearProjected CFCummulative CFCount0$-$-1$-$-2$-$-3$-$-PLEASE RESPOND TO THESE QUESTIONS ON ANOTHER TAB4$-$-Payback period0.00yearsQ#1Would you accept the project based on NPV, IRR?Would you accept the project based on Payback rule if project cut-offis 3 years?Q#2Impact of 2017 Tax Cut Act onNet Income, Cash Flows andDiscounted Payback PeriodCapital Budgeting (Investment ) DecisionsPresent Value(a)Estimate NPV, IRR and Payback Period of the project ifYearProjected CFDiscount factorDiscounted CFCummulative CFCounttax rateequals to 21%.Would you0$-1$0$-acceptor reject the project?1$-$0$-( b)As a CFO of the firm, which of the above twoscenarios (1) or (2)2$-$0$-would you choose? Why?3$-$0$-Q#3How would youexplain to your CEO what NPV means?4$-$0$-Payback period0.00yearsQ#4What areadvantages and disadvantages of using only Payback method?Q#5What are advantages and disadvantages of using NPV versus IRR?Q#6Explain the difference between independent projects and mutually exclusive projects.When you are confronted with Mutually Exclusive Projects and have coflictswith NPV and IRR results, which criterion would you use (NPV or IRR) and why?