Capital Budgeting Decisions				PRINCIPLES OF FINANCIAL MANAGEMENT
				GROUP 5 PROJECT (FINC 3310)
INSTRUCTOR:
1. Learning Objectives
(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				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:			$ (120,000)
4) Related start up cost			$ (5,000)	(60 Percent of Sales)		-60%
5) Inventory increase			$ 25,000	11) Depreciation (Straight Line)/YR			$ (60,000)
6) Accounts Payable increase			$ 5,000	12) Tax rate			35%
7) Equip. Salvage Value Estimated			$ 15,000	13) Cost of Capital (WACC)			10%
End of Year 4	(fully depreciated )
ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0)
YEAR	CF0	CF1	CF2	CF3	CF4
Investments:	0	1	2	3	4
1) Equipment cost
2) Shipping and Install cost
3) Start up expenses
Total Basis Cost (1+2+3)
4) Net Working Capital
Inventory Inc.- Acct. Payable Inc.	$ (20,000)	$ -	$ -	$ -	$ -
Total Initial Outlay
Operations:
Revenue
Operating Cost
Depreciation
EBIT
Taxes
Net Income (LOSS)				XXXXXX	XXXXX	XXXXX	XXXXX
TAX SHIELD DUE TO LOSS
Add back Depreciation
Total Operating Cash Flow				XXXXX	XXXXX	XXXXX	XXXXX
Terminal (END of 4th YEAR)
1) Release of Working Capital				$ -	$ -	$ -	$ 20,000
2) Salvage value (after tax)
Total							XXXXXX
Project Net Cash Flows			$ -	$ -	$ -	$ -	$
NPV =			IRR =			Payback=
COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10%
Q#1	Would you accept the project based on NPV, IRR?
	Would you accept the project based on Payback rule if project cut-off

Capital Budgeting (Investment) Decisions

(a) Estimate NPV, IRR and Payback Period of the project if the Marginal

Corporate Tax is reduced to 20%. Would you accept or reject the project?

Assume Straight-Line Depreciation.

(b) Estimate NPV, IRR and Payback Period of the project if Equipment is fully

Depreciated in first year and tax rate is reduced to 20%. Would you

Accept or reject the project?

(c) As a CFO of the firm, which of the above two scenarios (a) or (b)

Would you choose? Why?