File Home Insert Page Layout Formulas Data Review View Help O PROTECTED VIEW Be careful-files from the Internet can contain viruses. Unless you need to edit, it's safer to stay in Protect 357 - X Capital Budgeting Decisions (Scenario 2) 200,000 5% $ 1) Life Period of the Equipment - 4 years 8) Sales for first year (1) 2) New equipment cost $ 200,000) 9) Sales increase per year 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) 4) Related start up cost S (5,000) (as a percent of sales in Year 1) 5) Inventory increase 25,000 11) Depreciation (Full depreciation) 26) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate U 107) Equip. salvage value before tay $ 15,000 13) Cost of Capital (Discount Rate) $ (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) 23 Add back Depreciation $ 240,000 25 Total Operating Cash Flow $ 113,600 $ - $ 27 ESTIMATING Initial Outlay (Cash Flow. CFO, T-0) CFO 0 CF1CF2CF3CF4 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) 36 4) Net Working Capital 37 Increase in CA-Increase in CL 38 Total Initial Outlay S (200,000) $ (35,000) S (5,000) $ (240,000) $ (20.000) S (260,000) 41 Terminal: 42 1) Change in net WC 432) Salvage value (after tax) $ Salvage Value Before Tax (1-T) 20,000 XXXXX 19 EBIT 20 Taxes 21 Net Income $ (160,000) $ (33.600) $ (126,400) 23 Add back Depreciation $ 240,000 $ - CF2 CF3 CF4 25 Total Operating Cash Flow $ 113,600 27 ESTIMATING Initial Outlay (Cash Flow, CFO, T-0) CFO CF1 30 Year 31 Investments: 321) Equipment cost $ (200,000) 33 2) Shipping and Install cost $ (35,000) 34 3) Start up expenses $ (5,000) 35 Total Basis Cost (1+2+3) $ (240,000) 36 4) Net Working Capital 37 Increase in CA - Increase in CL $ (20.000) 38 Total Initial Outlay $ (260,000) $ 20,000 41 Terminal: 42 1) Change in net WC 432) Salvage value (after tax) 44 Total - $ Salvage Value Before Tax (1-T) XXXXX 46 Project Net Cash Flows (260,000) $ 113,600 $ . 48 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 project if equipment is fully depreciated in the first year and tax rate equals to 21% 52 (a) Would you accept the project based on NPV and IRR? Would you accept the project based on Payback rule if the project cut-off is 3 years? 59 Q#2 As a CFO of the firm which of the Scenarios (1) or (2) would you choose? Why