Question
Capital budgeting decisions learning objectives 1. understand how to use excel spreadsheet a, develop pro-forma income statement using excel spreadsheet b, compute net project cashflows,
Capital budgeting decisions
learning objectives
1. understand how to use excel spreadsheet
a, develop pro-forma 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
2) new equipment cost $(200,000)
3) equipment ship & install cost $(35,000)
4) related start-up cost $ (5,000)
5) Inventory increase $25,000
6) Accounts payable increase $5,000
7) equip. salvage value before tax $15,000
8) sales for first year (1) $200,000
9) sales increase per year 5%
10) operating cost (60% of sales) $(120,000)
(as a percent of sale in year 1 ) -60%
11) depreciation (straight line)/ TR $ (60,000)
12) Marginal corporate tax rate( T) 21%
13) Cost of captial (discount rate) 10%
Income statement
Revenue
opreating cost
Depreciation
EBIT
Taxes
Net Income
Year CF0 CF1 CF2 CF3 CF4
1) opreating cash flow
2) change in NWC
3) Captial spending
Total
Project Net cash flows
NPV= ? IRR=? Payback=?
Q#1 would you accept the project based on NPV, IRR?
Q#2 would you accept the project based on payback rule if project cut-off is 3 years?
Q#3 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 scenarios (a) and (b) would you choose? why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started