Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and 8 Capital Budgeting (Investment) De cisions 59 (a) Estimate NPV, IRR and Payback Period of the project if equipment is fully 60 depreciated in first year and tax rate equals to 21 %. Would you 61 accept or reject the project? 62 (b) As a CFO of the firm, which of the above two scenario (a) or (b) 63 would you choose? Why? FINC 3310-Fall 2019 Learning Objectives 1.Understand how to use EXCEL Spreadsheet (a) Develop proforma Income Statement Using Excel Spreadsheet (b) Compute Net Project Cashflows, NPV, and IRR (c) Develop problem-soling and critical thinking skills 9 and make long-term investment decisions 10 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 16 6) Accounts Payable increase 17 7) Equip. salvage value before tax 11 8) Sales for first year (1) $ 200,000 12 $ (200,000) 9) Sales increase per year 5% 13 (35,000) 10) Operating cost (60 % of Sales) $ (120,000) 14 $ (5,000) (as a percent of sales in Year 1) -60% 15 $ 25,000 11) Depreciation (Straight Line)YR $ (60,000) $ 5,000 12) Marginal Corporate Tax Rate (T 21% $ 15,000 13) Cost of Capital (Discount Rate) 10% 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFo, T 0) 22 23 CFO CF1 CF2 CF3 CF4 24 Year 1 2 3 4 25 Investments: 26 1) Equipment cost 2) Shipping and Install cost 27 28 3) Start up expenses 29 Total Basis Cost (1+2+3) 30 4) Not Working Canital. Sheet1 Sheet2 Sheet3 Investments 1) Equipment cost 26 27 2) Shipping and Install cost 28 3) Start up expenses 29 Total Basis Cost (1+2+3) 30 4) Net Working Capital 31 Total Initial Outlay 32 33 Operations: 34 Revenue 35 Operating Cost Depreciation 36 37 T 38 es 39 Net Income 40 Add back Depreciation 41 42 43 Total Operating Cash Flow XXX0X XXXXX XX000X XX000x 44 45 Terminal: 46 1) Change in net WC $ $ $ $ 20,000 XX000X - 47 2) Salvage value (after tax) Salvage Value Before Tax (1-T) 48 Total XX000X 49 50 Project Net Cash Flows S S $ 51 52 NPV Payback IRR 52. Sheett Sheet2 Sheet3 Total Operating Cash Flow XXX0X Terminal: 1) Change in net WC 2) Salvage value (after tax) 20,000 XXXXX Salvage Value Before Tax (1-T) Total XXX0X Project Net Cash Flows $ $ $ NPV IRR Payback= Qf#1 Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if proje ct cut-off is 3 years? 7 Q#2 58 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting(Investment) Decisions Estimate NPV, IRR and Payback Period of the project if equipment is fully depreciated in first year and tax rate equals to 21%. Would you 59 (a) 60 61 accept or reject the project? As a CFO of the firm, which of the above two scenario (a) or (b) 62 (b) 63 would you choose? Why
