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Posted on Aug 23, 2024

Paste BIU = == *2 += Merge & Center $ % ) 85 G60 XVfx B D E H Capital Budgeting Decisions 2 3 INSTRUCTOR:

Paste BIU = == *2 += Merge & Center $ % ) 85 G60 XVfx B D E H Capital Budgeting Decisions 2 3 INSTRUCTOR: PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) 19 s 1. Learning Objectives 6 (a) Develop proforma Project Income Statement Using Excel Spreadsheet 7 (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period 8 (C) Develop Problem Solving and Critical Thinking Skills 9 10 - 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000 12 2) New equipment cost $ (200,000) 9) Sales increase per year 5% 13 3) Equipment ship & install cost $ (35,000) 10) Operating cost: $ (120,000) 14 4) Related start up cost $ (5,000) (60 Percent of Sales -60% 155) Inventory Increase $ 25,000 11) Depreciation (Straight Line)/YF $ 16 6) Accounts Payable increase (60,000) $ 5,000 12) Tax rate 35% 177) Equip. Salvage Value Estimated $ 15,000 13) Cost of Capital (WACC) 10% 18 End of Year 4 (fully depreciated) 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 YEAR CFO CF1 CF2 CF3 CF4 0 25 Investments: 1 2 3 4 20 1) Equipment cost 27 2) Shipping and Install cost 25 3) Start up expenses 29 Total Basis Cost (1+2+3) > 4) Net Working Capital 1 Inventory Inc.- Acct. Payable Inc. $ 120.000 $ $ $ 33 Total Initial Outlay 34 - Operations: 2 Revenue Sheets 24 32 - $ CA Sheet2 Sheet3 Ready + Paste BIU a === ICH Merge & Center $ $ G60 1 x fx C D E F G H B 35 Operations: 36 Revenue 37 Operating Cost 38 Depreciation 39 EBIT 40 Taxes 41 Net Income (LOSS) TAX SHIELD DUE TO LOSS 43 Add back Depreciation Xxxxx 42 Xxxxx 44 45 XXOOX xxxxx xoxxx XXXXX Total Operating Cash Flow 46 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital 49 2) Salvage value (after tax) Total $ S $ $ 20,000 50 51 xxxxxx $ 57 58 52 Project Net Cash Flows $ $ $ 53 54 NPV = IRR = Payback 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 56 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? 5 Q#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions 51 (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. 64 (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? 57 (c) As a CFO of the firm, which of the above two scenario $) or (b) would you choose? Why? 63 65 66 GB 09 10 Q#3 What are advantages and disadvantages of using only Payback method? Sheet1 Sheet2 Sheet3 Ready Paste BIU = == *2 += Merge & Center $ % ) 85 G60 XVfx B D E H Capital Budgeting Decisions 2 3 INSTRUCTOR: PRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) 19 s 1. Learning Objectives 6 (a) Develop proforma Project Income Statement Using Excel Spreadsheet 7 (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period 8 (C) Develop Problem Solving and Critical Thinking Skills 9 10 - 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000 12 2) New equipment cost $ (200,000) 9) Sales increase per year 5% 13 3) Equipment ship & install cost $ (35,000) 10) Operating cost: $ (120,000) 14 4) Related start up cost $ (5,000) (60 Percent of Sales -60% 155) Inventory Increase $ 25,000 11) Depreciation (Straight Line)/YF $ 16 6) Accounts Payable increase (60,000) $ 5,000 12) Tax rate 35% 177) Equip. Salvage Value Estimated $ 15,000 13) Cost of Capital (WACC) 10% 18 End of Year 4 (fully depreciated) 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 YEAR CFO CF1 CF2 CF3 CF4 0 25 Investments: 1 2 3 4 20 1) Equipment cost 27 2) Shipping and Install cost 25 3) Start up expenses 29 Total Basis Cost (1+2+3) > 4) Net Working Capital 1 Inventory Inc.- Acct. Payable Inc. $ 120.000 $ $ $ 33 Total Initial Outlay 34 - Operations: 2 Revenue Sheets 24 32 - $ CA Sheet2 Sheet3 Ready + Paste BIU a === ICH Merge & Center $ $ G60 1 x fx C D E F G H B 35 Operations: 36 Revenue 37 Operating Cost 38 Depreciation 39 EBIT 40 Taxes 41 Net Income (LOSS) TAX SHIELD DUE TO LOSS 43 Add back Depreciation Xxxxx 42 Xxxxx 44 45 XXOOX xxxxx xoxxx XXXXX Total Operating Cash Flow 46 47 Terminal (END of 4th YEAR) 48 1) Release of Working Capital 49 2) Salvage value (after tax) Total $ S $ $ 20,000 50 51 xxxxxx $ 57 58 52 Project Net Cash Flows $ $ $ 53 54 NPV = IRR = Payback 55 COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% 56 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? 5 Q#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions 51 (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. 64 (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? 57 (c) As a CFO of the firm, which of the above two scenario $) or (b) would you choose? Why? 63 65 66 GB 09 10 Q#3 What are advantages and disadvantages of using only Payback method? Sheet1 Sheet2 Sheet3 Ready