Capital Budgeting Decisions (Scenario 1) 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000 2) New equipment cost **000+9) Sales increase per year 5% 3) Equipment ship & install cc # 10) Operating cost (60% of Sale 000000 4) Related start up cost $ (5,000) (as a percent of sales in Year -60% 5) Inventory increase $ 25,000 10 Depreciation (Suaight Line $ (60,000) 6) Accounts Payable increas $5,000 12) Marginal Corporate Tax Rate 217. 7) Equip. salvage value befor $15,000 13) Cost of Capital (Discount Ral 10% Year 1 2 3 Operations: 1/5 Revenue Operating cost Depreciation EBIT Taxes Net Income $ 200,000 S (120,000) $ (60.000) $ 20,000 $ 4,200 $ 15,800 Add back Depreciation $ 60,000 Total Operating Cash Flow $ 75,800 S . ESTIMATING Initial Outlay Cash Floy. Cto. T= 0) Year Investments: 1) Equipment cost $(200,000) 2) Shipping and Install cost $ (35,000) 3) Start up expenses $ (5,000) Total Basis Cost (1+2+3) $(240,000) 4) Net Working Capital Increase in CA - Increase in CLS (20.000) Total Initial Outlay $(260,000) S - $ Terminal: 1) Change in net WC 2) Salvage value (after tax) Total - S - Salvage Value Before Tax (1-1) 20,000 xx Xooox Project Net Cash Flows $(260,000) $ 75,800 $ $ . S NPV = IRR = Payback 091 (a) Would you accept the project based on NPV and IRR? (b) Would you accept the project based on Payback rule if the project cut-off is 3 years