File Home Insert Page Layout Formulas Data Vw Tell me what you want to do A 10 Wrap Tout General AA A Pasto BIU Merge Center 5 - 9 53 mert De Format Conditional Formu Formatting Table Styles Clipboard Fm Tube Cele K10 11 2 Capital Budgeting Decisions PRINCIPLES OF FINANCIAL MANAGEMENT FINAL ASSIGNMENT Complete the excel template and submit as an excel file Do your best! 5 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period $ 200,000 4% 5 (120,000) 8) Sales for first year (1) (200,000) 9) Sales increase per year (25,000) 10) Operating cost (5,000) (60 Percent of Sales) 25,000 11) Depreciation (Straight Lino)/YR 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) -60% 111) Life Period of the Equipment 4 years 122) New equipment cost $ 133) Equipment ship & Install cost $ 144) Related start up cost $ 155) Inventory Increase $ 106) Accounts Payable increase $ 97) Equip. Salvage Value Estimated End of Year (fully depreciated) 10 20 21 ESTIMATING Initial Outthy (Cash Flow CFO, TEO) Sheet1 Sheet2 Sheet $ (60,000) 35% 10% Type here to search O TE hp CFO 0 CF1 1 CF2 2 CF3 3 CF4 4 0 200,000 25,000 5,000 230,000 $ 25.000 $ $ $ $ 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 YEAR 24 25 Investments: 261) Equipment cost $ 27 2) Shipping and Install cost $ 28 3) Start up expenses $ 20 Total Basis Cost (1+2+3) $ 304) Net Working Capital 31 Inventory Inc - Acct. Payable Inc. $ 32 33 Total Initial Outlay 34 35 Operations; 30 Revenue a7 Operating Cost 3 Depreciation EBIT 40 Taxes 41 Net Income (LOSS) 47 TAX SHIELD DUE TO LOSS Sheet1 Sheet2 Sheet XXXXXX XXXXX XXXXX XXXXX 47 TAX SHIELD DUE TO LOSS 13 Add back Depreciation 44 45 XXXXX XXXXX XXXXX XXXXX Total Operating Cash Flow 40 47 Terminal (END of 4th YEAR) 411) Release of Working Capital 49 2) Salvage value (after tax) 50 Total $ s $ - $ 20,000 XXXXXX $ $ $ Payback 52 Project Net Cash Flows $ $ 53 54 NPV = IRR 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 55 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 is 3 years? 57 58 30 61 Q#2 SENSITIVITY and SCENARIO ANALYIS. Sheet1 Sheet2 Sheets A D 8 Q#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment) Decisions (a) Estimate NPV, IRR and Payback Period of the project if Marginal Corporate Tax is reduced to 20%. Would you accept or 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 reduced to 20%. Would you accept or reject the project? 1 (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 3 Q#3 How would you explain to your CEO what NPV means? Q#4 What are advantages and disadvantages of using only Payback method? -5 Q#5 What are advantages and disadvantages of using NPV versus IRR? Q#6 Explain the difference between independent projects and mutually exclusive projects. 27 When you are confronted with Mutually Exclusive Projects and have coflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? 2 78 TO 51 =u 34 015