Capital Budgeting Decisions PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) TRUC 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 $ 200,000 S (120,000) s (60,000) 8) Sales for first year (1) 1) Life Period of the Equipment = 4 years 2) New equipment cost 3) Equipment ship & install cost 4) Related start up cost (200,000) 9) Sales increase per year S $ (35,000) 10) Operating cost (5,000) (60 Percent of Sales) $ 25,000 11) iation (Straight Line YR increase ts Payable increase 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) 10% 7) Equip. Salvage Value Estimated$ End of Year (fully depreciated) ESTIMATING Initial Outlay (Cash Flow, CFO,T= 0) CFO CF1 CF2 CF3 CF4 1) Equipment cost 2) Shipping and Install cost 3) Start up e Total Basis Cost (1+2+3) 4) Net Working Capital Total Initial Outlay Operating Cost EBIT Net Income (LOSS) XXxXX TAX SHIELD DUE TO LOSS Add back Depreciation Total Operating Cash Flow -$20.000 2 1) Release of Working Capital IRR = COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT 10% Would you accept the project based on NPV, IRR? Would you accept the p period is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS Capital Budgeting (Investment) Decisions Estimate NPV, IRR and Payback Period of the project if Marginal Tax is to 20%, would you accept or reject the project? 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? As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 Q#4 5 How would you explain to your CEO what NPV means? What are What are advantages and disadvantages of using NPV versus IRR? s and disadvantages of using only Payback d? Capital Budgeting Decisions PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) TRUC 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 $ 200,000 S (120,000) s (60,000) 8) Sales for first year (1) 1) Life Period of the Equipment = 4 years 2) New equipment cost 3) Equipment ship & install cost 4) Related start up cost (200,000) 9) Sales increase per year S $ (35,000) 10) Operating cost (5,000) (60 Percent of Sales) $ 25,000 11) iation (Straight Line YR increase ts Payable increase 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) 10% 7) Equip. Salvage Value Estimated$ End of Year (fully depreciated) ESTIMATING Initial Outlay (Cash Flow, CFO,T= 0) CFO CF1 CF2 CF3 CF4 1) Equipment cost 2) Shipping and Install cost 3) Start up e Total Basis Cost (1+2+3) 4) Net Working Capital Total Initial Outlay Operating Cost EBIT Net Income (LOSS) XXxXX TAX SHIELD DUE TO LOSS Add back Depreciation Total Operating Cash Flow -$20.000 2 1) Release of Working Capital IRR = COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT 10% Would you accept the project based on NPV, IRR? Would you accept the p period is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS Capital Budgeting (Investment) Decisions Estimate NPV, IRR and Payback Period of the project if Marginal Tax is to 20%, would you accept or reject the project? 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? As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 Q#4 5 How would you explain to your CEO what NPV means? What are What are advantages and disadvantages of using NPV versus IRR? s and disadvantages of using only Payback d