New Equipment cost is 228500

Sales change% per year 2.53%

INSTRUCTOR: 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem Solving and Critical Thinking Skills $ 200,000 5% (120,000) $ 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 4(fully depreciated) 8) Sales for first year (1) (200,000) 9) Sales increase per year (35,000) 10) Operating cost: (5,000) (60 Percent of Sales) -60% 25,000 11) Depreciation (Straight Line)/YR 5,000 12) Tax rate 15,000 13) Cost of Capital (WACC) $ (60,000) 35% 10% ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) YEAR CFO 0 CF1 1 CF2 2 CF3 3 CF4 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. $ (20,000 $ $ $ $ Total Initial Outlay Operations: Revenue Operating Cost Depreciation EBIT Taxes Net Income (LOSS) TAX SHIELD DUE TO LOSS Add back Depreciation XXXXXX XXXXX XXXXX XXXXX Total Operating Cash Flow XXXXX XXXXX XXXXX XXXXX $ $ $ $ Terminal (END of 4th YEAR) 1) Release of Working Capital 2) Salvage value (after tax) Total 20,000 XXXXXX Project Net Cash Flows $ $ $ $ $ Payback= NPV = IRR = 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