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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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