Overview: Students will use Excel to analyze the NPV of a capital project using provided inputs and three potential scenarios. Based on the calculated NPV, students will determine if the firm should pursue the project.

Tasks: Using the provided information students must calculate the appropriate class flows associated with the project. These include:

1) cash flows from fixed assets;

2) cash flows from changes to operating capital; and

3) cash flows from operations.

Remember to consider the impact of taxes on cash flows. Calculate the base case scenario NPV.

After calculating the base case NPV, the next step is to calculate the changes to cash flows and net present value for the worst case and best case scenarios. The overall expected NPV can then be estimated using the assumption of a 50% likelihood of the base case, 25% likelihood of the worst case, and 25% likelihood of the best case occurring.

Given your answers for the above calculations, determine if the firm should pursue the project.

Project Calculations: Please consider the following when preparing your calculations.

Excel should be used to complete the work.

It may be easier to calculate a separate depreciation schedule, salvage value calculation, operating cash flows, and working capital cash flows. Once they have been calculated they may be combined together to calculate overall annual cash flows.

Calculations should be labeled appropriately so that a user (i.e. the instructor) is able to easily follow the flow of information.

Remember that the Excel NPV function does not allow the user to include the year 0 cash flow. This cash flow must be manually added to the other years to calculate the NPV accurately.

Capital Project Analysis		Capital Project Analysis
Inputs	Base Case Scenario (50%)	Worst Case (25%)	Best Case (25%)
Equipment Cost	$ 2,000,000.00
Equipment Setup Cost	$ 300,000.00
Years of Operation	5.00
Projected Unit Sales Yr 1	25,000.00
Projected Price Yr 1	$ 100.00
Variable Costs/Unit for Yr 1	$ 60.00
Fixed Costs for Yr 1	$ 500,000.00
NOWC as % of sales	10.00%
Projected Unit Sales Growth Per Year	5.00%	0%	20%
Equipment Salvage Value	600,000.00
Inflation of unit price	3.00%	1%	5%
Inflation of VC/unit	5.00%
Inflation of Fixed Costs	6.00%
Depreciation Method	MACRS 7
Tax Rate	35.00%
WACC	10.00%