NET CAPITAL SPENDING: 150,000
Sales Change per % per Year: 2.00%
Please finish the capital budgeting project. Write your name and class and section (1NTB) and year(2020) (1 pt of grade) on the TOP of your excel sheet. You MUST create two worksheets one is under the 35% Tax rate (one point of grade) and the 20% tax rate (one point of grade). 5% 1) Life Period of the Equipment = 4 years 2) New equipment cost $ 3) Equipment ship & install cost 4) Related start up cost $ 5) Inventory increase $ 6) Accounts Payable increase $ 7) Equip. Salvage Value Estimated $ End of Year (fully depreciated) 8) Sales for first year (1) $ 200,000 (200,000) 9) Sales increase per year (35,000) 10) Operating cost: $(120,000) (5,000) (60 Percent of Sa -60% 25,000 11) Depreciation (Straight Line S (60,000) 5,000 12) Tax rate 35% 15,000 13) Cost of Capital (WACC) 10% ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) YEAR CFO CF1 CF2 . CF3 3 2 1 CF4 4 3 4 Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Inventory Inc.- Acct. Payable Inc. 120.000 $ S S $ Total Initial Outlay Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS Add back Depreciation Total Operating Cash Flow XXXXXX XXXXX XXXXX XXXXX XXXXXXXXXXXXXXX XXXXX $ $ $ Terminal (END of 4th YEAR) 1) Release of Working Capital 2) Salvage value (after tax) Total $ 20,000 XXXXXX Project Net Cash Flows $ $ $ $ - $ NPV = IRR = Payback= COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 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? 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? (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 What are advantages and disadvantages of using only Payback method? Please finish the capital budgeting project. Write your name and class and section (1NTB) and year(2020) (1 pt of grade) on the TOP of your excel sheet. You MUST create two worksheets one is under the 35% Tax rate (one point of grade) and the 20% tax rate (one point of grade). 5% 1) Life Period of the Equipment = 4 years 2) New equipment cost $ 3) Equipment ship & install cost 4) Related start up cost $ 5) Inventory increase $ 6) Accounts Payable increase $ 7) Equip. Salvage Value Estimated $ End of Year (fully depreciated) 8) Sales for first year (1) $ 200,000 (200,000) 9) Sales increase per year (35,000) 10) Operating cost: $(120,000) (5,000) (60 Percent of Sa -60% 25,000 11) Depreciation (Straight Line S (60,000) 5,000 12) Tax rate 35% 15,000 13) Cost of Capital (WACC) 10% ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) YEAR CFO CF1 CF2 . CF3 3 2 1 CF4 4 3 4 Investments: 1) Equipment cost 2) Shipping and Install cost 3) Start up expenses Total Basis Cost (1+2+3) 4) Net Working Capital Inventory Inc.- Acct. Payable Inc. 120.000 $ S S $ Total Initial Outlay Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS Add back Depreciation Total Operating Cash Flow XXXXXX XXXXX XXXXX XXXXX XXXXXXXXXXXXXXX XXXXX $ $ $ Terminal (END of 4th YEAR) 1) Release of Working Capital 2) Salvage value (after tax) Total $ 20,000 XXXXXX Project Net Cash Flows $ $ $ $ - $ NPV = IRR = Payback= COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 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? 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? (c) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 What are advantages and disadvantages of using only Payback method
