| Capital Budgeting Project FINC 3310 student 13.xls Excel O. - A A LA Ariel AS fe Estimate NPV, IRR and Payback period of the project if Equipment is fully deprecated in first year and tax rate is reduce 1) Project Life (years) 2) New equipment cost 3) Shipping & Installment costs 4) Related start up cost 5) Inventory Increase 6) Accounts Payable Increase 7) Equip. Salvage Value Estimated at the End of Year 4 B) Sales for first year (1) 9) Sales Increase per year 110) Operating cost (80 Percent of Sales) 11) Depreciation Straight Line Initial Cost/YR 12) Toxtate 13) Cost of Capital (WACC) 24 1 YEAR Equipment tout Shoping and Install Startup expenses Total Capital Spending Mer Tax Salvage won Year ago - TSalvage Book Value) Not Working Capital Inventory Increase AP Inse) 51200,000) $ 35,000) $(5,000) $ 25,000 $ 5,000 $15,000 $ 200,000 5% 60.00% $ 160,000) 35% 10% 2 0 $(200.000) $ 35,000) 35.000) $1240,000) $ 120,000) $ 20.000 Proforma Income Tatement Raven Operating out Depreciation 14 EBIT Tons Notinoms (0) 5.200.000 $210,000 5.220.500 5 231.525 50120,000) 5 (00.000) $ 20,000 5 7,000 S 13.000 ' ' E = 14 Arial V V BIU av A DA A58 A x fx 46 Payback Period 47 48 Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off period 49 is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS: Capital Budgeting 50 (Investment ) Decisions (a) Estimate NPV, IRR and Payback period of the project if the Marginal Corporate Tax is reduced to 20%. Would you accept or 51 reject the project? Assume Straight-Line Depreciation. (b) Estimate NPV, IRR and Payback Period of the project if Equipment is fully depreciated in first year and tax rate is 52 reduced to 20%. Would you accept or reject the project? (c) As a CFO of the firm, which of the above two scenarios (a) or 53 (b) would you choose? Why? 54 #3 Explain to your CEO what the NPV results mean. #4 What are the advantages and disadvantages of using only 55 the Payback method? Q#5 What are the advantages and disadvantages of using NPV 56 versus IRR? 0#6 Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have conflicts with NPV and IRR 57 results, which criterion would you use (NPV or IRR) and why? 50 50 61 02 Question Sheet1 | Capital Budgeting Project FINC 3310 student 13.xls Excel O. - A A LA Ariel AS fe Estimate NPV, IRR and Payback period of the project if Equipment is fully deprecated in first year and tax rate is reduce 1) Project Life (years) 2) New equipment cost 3) Shipping & Installment costs 4) Related start up cost 5) Inventory Increase 6) Accounts Payable Increase 7) Equip. Salvage Value Estimated at the End of Year 4 B) Sales for first year (1) 9) Sales Increase per year 110) Operating cost (80 Percent of Sales) 11) Depreciation Straight Line Initial Cost/YR 12) Toxtate 13) Cost of Capital (WACC) 24 1 YEAR Equipment tout Shoping and Install Startup expenses Total Capital Spending Mer Tax Salvage won Year ago - TSalvage Book Value) Not Working Capital Inventory Increase AP Inse) 51200,000) $ 35,000) $(5,000) $ 25,000 $ 5,000 $15,000 $ 200,000 5% 60.00% $ 160,000) 35% 10% 2 0 $(200.000) $ 35,000) 35.000) $1240,000) $ 120,000) $ 20.000 Proforma Income Tatement Raven Operating out Depreciation 14 EBIT Tons Notinoms (0) 5.200.000 $210,000 5.220.500 5 231.525 50120,000) 5 (00.000) $ 20,000 5 7,000 S 13.000 ' ' E = 14 Arial V V BIU av A DA A58 A x fx 46 Payback Period 47 48 Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off period 49 is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS: Capital Budgeting 50 (Investment ) Decisions (a) Estimate NPV, IRR and Payback period of the project if the Marginal Corporate Tax is reduced to 20%. Would you accept or 51 reject the project? Assume Straight-Line Depreciation. (b) Estimate NPV, IRR and Payback Period of the project if Equipment is fully depreciated in first year and tax rate is 52 reduced to 20%. Would you accept or reject the project? (c) As a CFO of the firm, which of the above two scenarios (a) or 53 (b) would you choose? Why? 54 #3 Explain to your CEO what the NPV results mean. #4 What are the advantages and disadvantages of using only 55 the Payback method? Q#5 What are the advantages and disadvantages of using NPV 56 versus IRR? 0#6 Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have conflicts with NPV and IRR 57 results, which criterion would you use (NPV or IRR) and why? 50 50 61 02 Question Sheet1