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Capital Budgeting Decisions ( Scenario 2 ) Life Period of the Equipment = 4 years New equipment cost Equipment ship & install cost Related start

Capital Budgeting Decisions (Scenario 2)
Life Period of the Equipment =4 years
New equipment cost
Equipment ship & install cost
Related start up cost
Inventory increase
Accounts Payable increase
Equip salyage value before tax
Year
Operations: I/S
Revenue
Operating Cost
Depreciation EBIT
Taxes
Net Income
Add back Depreciation
Total Operating Cash Flow
ESTIMATING Initial Outlay (Cash Flow, CFo, T=0)
Year
CF0
Investments:
Equipment cost
Shipping and Install cost
Start up expenses Total Basis Cost (1+2+3)
Net Working Capital
Increase in CA - Increase in CL
Total Initial Outlay
Sales for first year (1)(200,000)9) Sales increase per year (35,000)10 Operating cost of Sales)(5,000)(as a percent of sales in Year 1)25,00011) Depreciation (Full depreciation)5,00012) Marginal Corporate Tax Rate (T)15,00013) Cost of Capital (Discount Rate)
1
2
3?
$200,000
$(120,000)
$(240,000)
$(160,000)
$(33,600)
$(126,400)
$240,000
$113,600$ $ $
CF22
CF33
CF4CF1CF2CF3CF4
1,2,3,4 $(200,000) $(35,000) $,(5,000) $(240,000)
$(20,000)
$(260,000)
$ 200,000
5%
$ (120,000)
s ,(240,000)
$ ,(240,000)10%
4
4
Terminal:
Change in net WC
Salvage value (after tax) Total
Salvage Value Before Tax (1-T)
Project Net Cash Flows
IRR=
Payback=
NPV=
Q#1 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and
Capital Budgeting (Investment) Decisions
(a) Estimate NPV, IRR and Payback Period of the project if equipment is fully depreciated in the first year and tax rate equals to 21%.
(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?
Q:2 As a CFO of the firm, which of the Scenarios (1) or (2) would you choose? Why?
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