Capital Budgeting Decisions Student 1: Student 2: Student 3: 4 Nore Numbers in parenthesis mean negative amounts) 5 1) Life Period of the Equipment 6 2) New equipment cost 7 3) Equipment ship & install cost 8 4) Related start up cost 9 5) Sales for the first year (year 1) 10 6) Sales increase per year 120,000) 60% 60,000) 21% 10% 4 years 7) Operating cost (60% of Sales) in year 1 (200,000(as a percent of sales) (35,000) 8) Depreciation per year (5,000) 9) Marginal Corporate Tax Rate 200,000 10) Cost of Capital (WAC 5% 2 Q1. Please fill the cells below (blue boxes) using the information above 13 CFO CF1 CF2 CF3 CF4 Year $ (200,000) $ (35,000) 5,000 16 1 Equipment cost 17 2) Shipping and Install cost 18 3) Start up expenses 19 Total Initial Investment (1+2+3) 20 21 Operations: 22 Revenue 23 Operating Cost 200,000 120,000 126,000 24 Depreciation 25 EBIT 27 Net Income (NI) 29 Total Operating Cash Flow 26 Taxes 28 30 (Add back Depreciation to NI) 32 Project Net Cash Flows $ (240,000) $ 3 2. Calculate NPV and IRR in the cells using Excel formulas 35 NPV- IRR 37 Q3. Will you accept or reject the project based on NPV? Explain your reason 39 40 Q4. Will you accept or reject the project based on IRR? Explain your reason