Capital Budgeting Decisions					Instructor:
				FINC 33100
Learning Objectives
1. Understand how to use EXCEL Spreadsheet
(a) Develop proforma Income Statement Using Excel Spreadsheet
(b) Compute Net Project Cashflows, NPV, and IRR
(c) Develop problem-solving and critical 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)			21%
7) Equip. salvage value before tax			$ 15,000	13) Cost of Capital (Discount Rate)			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)
4) Net Working Capital
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) Change in net WC				$ -	$ -	$ -	$ 20,000
2) Salvage value (after tax)			Salvage Value Before Tax (1-T)				XXXXX
Total							XXXXX
Project Net Cash Flows			$ -	$ -	$ -	$ -	$
NPV =			IRR =			Payback=
Profitability Index =						Discounted 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 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and
	Capital Budgeting (Investment ) Decisions
(a)	Estimate NPV, IRR and Payback Period of the project if equipment is fully
	depreciated in first year and tax rate equals to 21%. Would you
	accept or reject the project?
( b)	As a CFO of the firm, which of the above two scenario (a) or (b)
	would you choose? Why?
Q#3 How would you explain to your CEO what NPV means?
Q#4 What are advantages and disadvantages of using only Payback method?
Q#5 What are advantages and disadvantages of using NPV versus IRR?
Q#6 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?