Capital Budgeting Decisions (Scenario 2) $ 5 1) Life Period of the Equipment - 4 years 8 ) Sales for first year (1) 2) New equipment cost 5 (200,000) 9) Sales increase per year 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) 74) Related start up cost (5,000) (as a percent of sales in Year 1) 8 5) Inventory increase 25,000 11) Depreciation (Full depreciation) 6) Accounts Payable increase 5,000 12) Marginal Corporate Tax Rate (0) 07) Equip. salvage value before ta $ 15,000 13) Cost of Capital (Discount Rate) 200,000 5% (120,000) -60% (240,000) 21% 10% $ 13 Year 15 Operations: I/S 16 Revenue 17 Operating Cost 18 Depreciation 19 EBIT 20 Taxes 21 Net Income $ 200,000 $ (120,000) $ (240,000) $ (160,000) $ (33.600) $ (126,400) 22 23 Add back Depreciation $ 240,000 25 Total Operating Cash Flow $ 113,600 S - 27 ESTIMATING Initial Outlay (Cash Flow. Co. T-0) 29 30 Year 31 Investments: 32 1) Equipment cost 33 2) Shipping and Install cost 34 3) Start up expenses 35 Total Basis Cost (1+2+3) 364) Net Working Capital 37 Increase in CA - Increase in CL 38 Total Initial Outlay S (200,000) $ (35,000) S (5,000) S (240,000) $ (20.000) $ (260,000) $ - $ 41 Terminal: 42 1) Change in net WC 43 2) Salvage value (after tax) 44 Total Salvage Value Before Tax (1-T) 20,000 xxxcox xxxxx 18 Project Net Cash Flows $(260,000) $ 113,600 $ - $ - $ 45 NPV- IRR Payback 50 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 projectif equipment is fully depreciated in the first year and tax rate equals to 21% 52 (a) 54 (b) Would you accept the project based on NPV and IRR? 55 (C) Would you accept the project based on Payback rule if the project cut-off is 3 years? 59 ON2 As a CFO of the firm, which of the Scenarios (1) or (2) would you choose? Why