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Capital Budgeting Decisions (Scenario 1) 21000 $ 120,000) DLR Period of the Ennen 4 YTB Sales for Int year Z Novequipment cont $ 200,000 9 Sales Increase psy 13 Equipment ship & Install sout (35,000 10 Operating coat (ory of Sale 3) Related artup poat S - 1.000 (28 apercent of sales In Year 1) 5 nentory thouse $ 2.000 11. Os ecleon Sur Une R IS Account Payable Increase 2.000 12) Marpinal Corporate Tax Ratu 7) Equip vaga value before tex $ 15,000 13) Cost af Capital (Discount Rate) Operations: US Revenue Operating Cost Depreciation EBIT Taxes Net Income $ 200,000 $ 210.000 $ 220,500 $ 231,525 $(120,000) S(128,00C S (132,300 $ (138,915) (60,000) (60,000) (00,000) (60,000) $ 20,000 $ 24,000 S 28,200 $ 32,810 $ 4,200 $ 5,040 5 5.922 $ 6.848 $ 15,800 $ 18,980 3 22,278 $ 25,762 60,000 85,762 CFA CF2 F3 CFA Add back Depreciation $ 60,000 $ 60,000 S 60,000 $ Total Operating Cash Flow $ 75,800 $ 78,960 $ 82,278 ESTIMATING Initial Outlay (Cash Flow, CFO, TEOL CFO Yeer Investments; 1) Equipment cost S (200,000) 2) Shipping and install cost snipping and install cost $(35,000) 3) Start up expenses S (5,000) Total Basis Cast (1+2+3) S (240,000) 4 ) Net Working Capital Increase in CA - Increase in CL $120.000) Total Initial Outlay S(200,000) 4 * Terminal: 1) Change in net WO 2) Salvage value (after tax) Total $ 20,000 Salvage Value Before Tax (1-T) Project Net Cash Flows X0000 85.762 $1260.000 $ 75,800 $ 78,960 $ 82.278 5 NPV = IRR = Payback Q#1 (a) Would you accept the project based on NPV and IRR? (b) Would you accept the project based on Payback rule if the project cut-off is 3 years? QW2 How would you explain to your CEO what NPV means? #3 What are the advantages and disadvantages of using the Payback method only? ON4 What are the advantages and disadvantages of using NPV Versus IRR? -H29H31 $ $ 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 13 2) New equipment cost $ (200,000) 9) Sales increase per year 14 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) 154) Related start up cost $ (5,000) (as a percent of sales in Year 1) 16 5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR 176) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 187) Equip. salvage value before tax $ 15,000 13) Cost of Capital (Discount Rate) 200,000 5% (120,000) 60% (60,000) 21% 10% $ 21 Year Operations: I/S Revenue 25 Operating Cost 26 Depreciation EBIT Taxes Net Income $ 200,000 $ 210,000 $ 220,500 $ 231,525 $ (120,000) $ (126,000 $(132,300 $ (138,915) $ (60,000 $ (60.000) $ (60.000 $ (60.000) $ 20,000 $ 24,000 $ 28,200 $ 32,610 $ 4,200 $ 5,040 $ 5,922 $ 6,848 $ 15,800 $ 18,960 $ 22,278 $ 25,762 31 Add back Depreciation Total Operating Cash Flow 35 ESTIMATING Initial Outlay (Cash Flow, CFO, T-0) $ 60,000 $ 60,000 $ 60,000 $ $ 75,800 $ 78,960 $ 82.278 S 60,000 85,762 8 C ESTIMATING Initial Outlay (Cash Flow, CFO, T=0 CFO CFO CF1 CF 38 CF2 CF CF3 CF CF4 CFA 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 $ (200,000) $ (35,000) $ (5,000) $(240,000) $ (20,000) $(260,000) 49 Terminal: 501) Change in net WC 512) Salvage value (after tax) Total - $ - Salvage Value Before Tax (1-T) $ - $ 20,000 XXXXX XXXXX Project Net Cash Flows $(260,000) $ 75,800 $ 78,960 $ 82,278 $ 85,762 NPV = IRR = Payback= sa Q#1 (a) Would you accept the project based on NPV and IRR? Capital Budgeting Decisions (Scenario 1) 21000 $ 120,000) DLR Period of the Ennen 4 YTB Sales for Int year Z Novequipment cont $ 200,000 9 Sales Increase psy 13 Equipment ship & Install sout (35,000 10 Operating coat (ory of Sale 3) Related artup poat S - 1.000 (28 apercent of sales In Year 1) 5 nentory thouse $ 2.000 11. Os ecleon Sur Une R IS Account Payable Increase 2.000 12) Marpinal Corporate Tax Ratu 7) Equip vaga value before tex $ 15,000 13) Cost af Capital (Discount Rate) Operations: US Revenue Operating Cost Depreciation EBIT Taxes Net Income $ 200,000 $ 210.000 $ 220,500 $ 231,525 $(120,000) S(128,00C S (132,300 $ (138,915) (60,000) (60,000) (00,000) (60,000) $ 20,000 $ 24,000 S 28,200 $ 32,810 $ 4,200 $ 5,040 5 5.922 $ 6.848 $ 15,800 $ 18,980 3 22,278 $ 25,762 60,000 85,762 CFA CF2 F3 CFA Add back Depreciation $ 60,000 $ 60,000 S 60,000 $ Total Operating Cash Flow $ 75,800 $ 78,960 $ 82,278 ESTIMATING Initial Outlay (Cash Flow, CFO, TEOL CFO Yeer Investments; 1) Equipment cost S (200,000) 2) Shipping and install cost snipping and install cost $(35,000) 3) Start up expenses S (5,000) Total Basis Cast (1+2+3) S (240,000) 4 ) Net Working Capital Increase in CA - Increase in CL $120.000) Total Initial Outlay S(200,000) 4 * Terminal: 1) Change in net WO 2) Salvage value (after tax) Total $ 20,000 Salvage Value Before Tax (1-T) Project Net Cash Flows X0000 85.762 $1260.000 $ 75,800 $ 78,960 $ 82.278 5 NPV = IRR = Payback Q#1 (a) Would you accept the project based on NPV and IRR? (b) Would you accept the project based on Payback rule if the project cut-off is 3 years? QW2 How would you explain to your CEO what NPV means? #3 What are the advantages and disadvantages of using the Payback method only? ON4 What are the advantages and disadvantages of using NPV Versus IRR? -H29H31 $ $ 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) 13 2) New equipment cost $ (200,000) 9) Sales increase per year 14 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) 154) Related start up cost $ (5,000) (as a percent of sales in Year 1) 16 5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR 176) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 187) Equip. salvage value before tax $ 15,000 13) Cost of Capital (Discount Rate) 200,000 5% (120,000) 60% (60,000) 21% 10% $ 21 Year Operations: I/S Revenue 25 Operating Cost 26 Depreciation EBIT Taxes Net Income $ 200,000 $ 210,000 $ 220,500 $ 231,525 $ (120,000) $ (126,000 $(132,300 $ (138,915) $ (60,000 $ (60.000) $ (60.000 $ (60.000) $ 20,000 $ 24,000 $ 28,200 $ 32,610 $ 4,200 $ 5,040 $ 5,922 $ 6,848 $ 15,800 $ 18,960 $ 22,278 $ 25,762 31 Add back Depreciation Total Operating Cash Flow 35 ESTIMATING Initial Outlay (Cash Flow, CFO, T-0) $ 60,000 $ 60,000 $ 60,000 $ $ 75,800 $ 78,960 $ 82.278 S 60,000 85,762 8 C ESTIMATING Initial Outlay (Cash Flow, CFO, T=0 CFO CFO CF1 CF 38 CF2 CF CF3 CF CF4 CFA 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 $ (200,000) $ (35,000) $ (5,000) $(240,000) $ (20,000) $(260,000) 49 Terminal: 501) Change in net WC 512) Salvage value (after tax) Total - $ - Salvage Value Before Tax (1-T) $ - $ 20,000 XXXXX XXXXX Project Net Cash Flows $(260,000) $ 75,800 $ 78,960 $ 82,278 $ 85,762 NPV = IRR = Payback= sa Q#1 (a) Would you accept the project based on NPV and IRR