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--- Capital Budgeting Decisions Instructor Prot. Pechersky FINC 3310 - Fall 2019 Learning Objectives 1. Understand how to use EXCEL Spreadsheet (a) Develop proforma Income Statement Using Excel Spreadsheet (b) Compute Net Project Cashflows, NPV, and IRR (c) Develop problem-solving and critical thinking skills and make long-term investment decisions 4 years Le Period of the age 2 wement con Eiendship & Sales for first year 200.000 pery 35.000 10 Operating costs 5,000 as a percent of 25.000 19 Depreciation ( S U 5.000 12 Marginal Corporax 15.000 coloc S R tory Increase Account Pa n crease nou geboretak ) ESTIMATING Ini Outlay Cash Flow CFT Investments 1) Equipment Cost 2) Shipping and instalost 3) Startup expenses Total Basis Cost (1+23) 4) Net Working Capital Total initial Outlay Operations: Revenge Operating cost Depreciation Net Income Add back Depreciation Total Operating Cash Flow Terminal 1) Change in net WC 2) Salvage value (after tax) Total Salvage Value Before Tax (1-T) Proct Net Cashows NPV Would you accept the project based on NPV, RR? Would you accept the project based on Payback rule project cut-of ORP Impact of 2017 Tax Cut Act on Net Income Cash Flows and Capital Budgeting investment ) Decisions Estimate NPV, RR and Payback period of the project equipment is deprecated in first year and tax rate equit 215 Would you accept of the project? (b) As a CFO of the firm, which of the above two scenario (a) or would you choose? Why? QB3 How would you explain to your CEO what NPV means? 84 What are advantages and disadvantages of using only Payback method QIS What are advantages and disadvantages of using NPV versus RR? QAG Explain the difference between independent projects and mutually exclusive projects When you are confronted with Muty Exclusive Projects and have colis with NPV and IRR results, which criterion would you use (NPV ORR) and why