Answered step by step
Verified Expert Solution
Question
...
1 Approved Answer
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
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started