Proforma Income Statement Capital Budgeting Lets return to the proforma income statement we created for Cisco (info given below) that we did in Week 2 and complete the analysis to determine if the project is desirable. Using the spreadsheet you constructed in Week 2 and the cost of capital calculations you computed in Week 8 to determine if Cisco should do the Cheetah project. Use the following capital budgeting techniques. Payback period Net present value Internal rate of return Now lets test the sensitivity of the project to some changes in the assumptions. Take the cost of capital you previously computed (in week 8) and add 2% to the value (for example, if WACC was 12%, make it 14%) and recalculate NPV. What happens to IRR? Is the project still desirable? Suppose the cost of goods sold percentage rises by 3%. Compute the payback period, NPV and IRR. Use the original WACC you computed. How sensitive is NPV to the changes made in 4 and 5? Suppose Cisco (ticker symbol - csco) has decided to introduce a new high speed router, the Cheetah. Before they launch the Cheetah, they conducted an analysis to see if the Cheetah would be a desirable investment. The company estimated that it would sell 10 million Cheetahs per year at a price of $250 for the next six years. After the first year of sales, the quantity sold will increase by 3% per year for the remaining life of the project. The initial capital outlay is determined to be $2.5 billion and a $500 million outlay in net working capital (NWC) would also be required. Assume that there is a one-time investment in NWC and that this will be recovered at the end of the project. Assume that the equipment used will be depreciated using the MACRS 7 year schedule and that the equipment has a salvage value of zero. At the end of year 6, the equipment will be sold for its book value. Also, assume that that the tax rate is 25%. Using information from Ciscos financial statements (you may want to use Morningstar.com or some other online site) estimate the operating cash flows from the project. Make any simplifying assumptions that are necessary to produce the estimate.