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B100 X r for K MACRS TABLE Depreciation rate for recovery period 6 Capital Budgeting Decisions CASE STUDY FINC 3310 - SPRING 2020 7 Learning Objectives 9 1. Understand how to use EXCEL Spreadsheet 10 (a) Develop proforma Income Statement Using Excel Spreadsheet 11 (b) Compute Net Project Cashflows, NPV, and IRR 12 (c) Develop problem-solving and critical thinking skills and make long-term investment decisions $ 200.000 $% 15 1) Life Period of the Equipment = 4 years 16 21 New equipment cost 17 3) Equipment ship & Install cost 18 4) Related start up cost 19 51 Inventory increase 206) Accounts Payable increase 217) Equip. salvage value before tax ($200,000) ($ 35,000) $5,000) $25.000 $5,000 $15,000 8) Sales for first year (1) 91 Sales increase per year 10) Operating cost (50% of Sales) (as a percent of sales in Year 1) 11) Depreciation 12) Marginal Corporate Tax Rate (T) 13) Cost of Capital (Discount Rate) $ (120,000) -60% Use 3-yr MACRIS 36% 10% Fing data in the cells colored only. Do not write in any other cell. Do not delete any row or column 2 ESTIMATING Initial Outlay (Cash Flow, CFO, T-0) -70 CFO 20 Year 29 Investments: 301) Equipment cost 31 2) Shipping and Install cost 323) Start up expenses 39 Total Basis Cost (1+2+3) 344) Net Working Capital 35 Total Initial Outlay Depreciation Calculation negative 37 Operations: 2 Sales 39 Operating Cost 40 Depreciation 11 EBIT 42 Taxes 13 Net Income Depreciation Basis: # of years: Macrs 3 years Year Macrs % Depreciation SO Case and Template Response Sheet3 N C A 10-22 PM 5/1/2020 B100 x fx K 344) Net Working Capital 36 Total Initial Outlay Depreciation Calculation negative 37 Operations: Sales 29 Operating Cost 40 Depreciation 411 EBIT 42 Taxes 431 Net Income Depreciation Basis: # of years: Macrs A $ $ $ . A A A Year Basis Macrs % Depreciation $0 46 Add back Depreciation . . $ $ $ $ S $ . . 47 Total Operating Cash Flow $ . . $0 49 Terminal values: 50 1) Change in net WC 512) Salvage value (after tax) 5 Total Salvage value*(1 - marginal tax rate) 54 Project Net Cash Flows 56 NPV = $0.00 IRR = #NUM! Payback= 0.00 Payback Period 58 Profitability Index = #DIV/0! Discounted Payback = 0.00 Projected CF Cummulative CF Count PLEASE RESPOND TO THESE QUESTIONS ON ANOTHER TAB Payback period Discounted Payback Period Presenl Vue Proiected CF Discount factor Discounted CF Cummulative CF Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off is 3 years? 6 #2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions 70 (a) Estimate NPV, IRR and Payback period of the project if tax rate equals to 21%. Would you accept or reject the project? 73(b) As a CFO of the firm, which of the above two scenarios (1) or (2) Case and Template Response Sheet3 POEL e a 9 0 * A 10:23 PM GING 12/20201 B100 X fo E 46 NPV = $0.00 IRR = NUM! Payback= 0.00 Payback Period se Profitability Index = #DIV/0! Discounted Payback = 0.00 Cummulative CF Count Projected CF OS 1 S S PLEASE RESPOND TO THESE QUESTIONS ON ANOTHER TAB Payback period 3 yo&re accept the projec 65 Q#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off is 3 years? 68 Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting Investment ) Decisions 70 (a) Estimate NPV, IRR and Payback period of the project if tax rate equals to 21%. Would you accept or reject the project? 73(b) As a CFO of the firm, which of the above two scenarios (1) or (2) 74 would you choose? Why? 75 Q#3 How would you explain to your CEO what NPV means? Discounted Payback Period Present VAUA Projected CF Discount factor Discounted CF Cummulative CF Payback period 77 #4 What are advantages and disadvantages of using only Payback method? 79 Q#5 What are advantages and disadvantages of using NPV versus IRR? 1 [111 B1 Q#6 Explain the difference between independent projects and mutually exclusive projects. When you are confronted with Mutually Exclusive Projects and have coflicts with NPV and IRR results, which criterion would you use (NPV or IRR) and why? For 02. First complete this spreadsheet Then right-click on the tab Select Move or Copy Check the 'Create a Copy' box in the lower left corner of the pull-out menu Click "OK" a copy of the completed spreadshest will be created. You can proceed to change the tax rato 21% and adjust the payback periods Adjust salvage value atter tax You should use the results to answer the questions Case and Template Ele Response Sheet3 a 1 9 * A 10:24 PM ENG S12020 Discounted Payback Period Present Value Year Projected CF Discount factor Discounted CF Cummulative CF Count $0 $0 $ $0 Payback period years