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Capital Budgeting Decisions FINC 3310 - FALL 2018 - Group Assignment (up to THREE group members) Learning Objectives 1. Understand how to use Excel spreadsheet
Capital Budgeting Decisions | |||||||
FINC 3310 - FALL 2018 - Group Assignment (up to THREE group members) | |||||||
Learning Objectives | |||||||
1. Understand how to use Excel spreadsheet | |||||||
(a) Develop proforma Project Income Statement Using Excel Spreadsheet | |||||||
(b) Compute Net Project Cash flows, NPV, IRR and PayBack Period | |||||||
(c) Develop Problem-Solving and Critical Thinking Skills | |||||||
1) Life Period of the Equipment = 4 years | 7) Sales increase per year | 5% | |||||
2) New equipment cost | $ (200,000) | 8) Operating cost: | $ (120,000) | ||||
3) Equipment ship & install cost | $ (35,000) | (60 Percent of Sales) | -60% | ||||
4) Related start up cost | $ (5,000) | 9) Depreciation (Straight Line)/YR | $ (60,000) | ||||
5) Equip. Salvage Value | $ 15,000 | 10) Corporate Marginal Tax Rate | 21% | ||||
6) Sales for first year (1) | $ 200,000 | 11) Cost of Capital (WACC) | 10% | ||||
ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0) | |||||||
CF0 | CF1 | CF2 | CF3 | CF4 | |||
Year | 0 | 1 | 2 | 3 | 4 | ||
Investments: | |||||||
1) Equipment cost | |||||||
2) Shipping and Install cost | |||||||
3) Start up expenses | |||||||
Total Basis Cost (1+2+3) | $ - | ||||||
Total Initial Outlay | $ - | ||||||
Operations: | |||||||
Revenue | |||||||
Operating Cost | |||||||
Depreciation | |||||||
EBIT | |||||||
Taxes | |||||||
Net Income | |||||||
Add back Depreciation | |||||||
Total Operating Cash Flow | XXXXX | XXXXX | XXXXX | XXXXX | |||
Terminal: | |||||||
1) Salvage value (after tax) | Salvage Value Before Tax (1-T) | XXXXX | |||||
Total | XXXXX | ||||||
Project Net Cash Flows | $ - | $ - | $ - | $ - | $ | ||
NPV = | IRR = | Payback= | |||||
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 How would you explain to your CEO what NPV means? | |||||||
Q#3 What are advantages and disadvantages of using only Payback method? | |||||||
Q#4 What are advantages and disadvantages of using NPV versus IRR? | |||||||
Q#5 Explain the difference between independent projects and mutually exclusive projects. | |||||||
When you are confronted with Mutually Exclusive Projects and have coflicts | |||||||
with NPV and IRR results, which criterion would you use (NPV or IRR) and why? |
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