Capital Budgeting Decisions (Scenario 2) 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 2) Ney equipment cost ###00. 9) Sales increase per gear 3) Equipment ship & install cos $ (35,000) 10) Operating cost (60% of Sales) 4) Related start up cost $ (5.000) (as a percent of sales in Year 1) 5) Inventory increase $ 25.000 Depreciation /Full depreciation 6) Accounts Payable increase $ 5.000 12) Marginal Corporate Tax Rate (i 7) Equip. salvage value before ! $15,000 13) Cost of Capital (Discount Rate $ 200,000 5% $ (120,000) -60% * * 21% 10% Year Operations: I/S Revenue Operating Cost Depreciation EBIT Taxes Net Income $ 200,000 $(120,000) $(240.000) S(160,000) $ (33.600) S(126,400) Add back Depreciation $ 240,000 Total Operating Cash Flow $ 113,600 S - ESTIMATING Initial Outlay (Cash Floy. CFO. T: () Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Increase in CA - Increase in CL Total Initial Outlay S (35,000) S (5,000) #******* $ (20.000) - S - Salvage Value Before Tax (1-1) S - Terminal: 1) Change in net WC 2) Salvage value (after tax) Total $ 20,000 XXXXX Project Net Cash Flows ######## $ 113,600 $ - $ - $ - NPV = IRR = Payback Q#1 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions Estimate NPV, IRR and Payback period of the project if equipment is fully depreciated in the first year and tax rate equals to 21%. (a) (b) Would you accept the project based on NPV and IRR? (c) Would you accept the project based on Payback rule if the project cut-off is 3 years? Capital Budgeting Decisions (Scenario 2) 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 2) Ney equipment cost ###00. 9) Sales increase per gear 3) Equipment ship & install cos $ (35,000) 10) Operating cost (60% of Sales) 4) Related start up cost $ (5.000) (as a percent of sales in Year 1) 5) Inventory increase $ 25.000 Depreciation /Full depreciation 6) Accounts Payable increase $ 5.000 12) Marginal Corporate Tax Rate (i 7) Equip. salvage value before ! $15,000 13) Cost of Capital (Discount Rate $ 200,000 5% $ (120,000) -60% * * 21% 10% Year Operations: I/S Revenue Operating Cost Depreciation EBIT Taxes Net Income $ 200,000 $(120,000) $(240.000) S(160,000) $ (33.600) S(126,400) Add back Depreciation $ 240,000 Total Operating Cash Flow $ 113,600 S - ESTIMATING Initial Outlay (Cash Floy. CFO. T: () Year Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Increase in CA - Increase in CL Total Initial Outlay S (35,000) S (5,000) #******* $ (20.000) - S - Salvage Value Before Tax (1-1) S - Terminal: 1) Change in net WC 2) Salvage value (after tax) Total $ 20,000 XXXXX Project Net Cash Flows ######## $ 113,600 $ - $ - $ - NPV = IRR = Payback Q#1 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions Estimate NPV, IRR and Payback period of the project if equipment is fully depreciated in the first year and tax rate equals to 21%. (a) (b) Would you accept the project based on NPV and IRR? (c) Would you accept the project based on Payback rule if the project cut-off is 3 years