Would like to double check that my calculation are correct as well as plug in the missing payback. And Cant figure out answers to q1-q6

G H 200,000 5% (120,000) -60% (60,000) 21% 10% CF4 4 A E F TU 11 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 12 2) New equipment cost $ (200,000) 9) Sales increase per year 13 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) $ 14 4) Related start up cost $ (5,000) (as a percent of sales in Year 1) 15 5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR $ 16 6) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 17 7) Equip. salvage value before tax $ 15,000 13) Cost of Capital (Discount Rate) 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 CFO CF1 CF2 CF3 24 Year 0 1 2 3 25 Investments: 26 1) Equipment cost $ (200,000) 27 2) Shipping and Install cost $ (35,000) 28 3) Start up expenses $ (5,000) 29 Total Basis Cost (1+2+3) $ (240,000) 30 4) Net Working Capital $ (20,000) 31 Total Initial Outlay $ (260,000) 32 33 Operations: 34 Revenue $ 200,000 $ 210,000 $ 220,500 $ 231,525 $ 35 Operating Cost $ (120,000) $ (126,000) $ (132,300) $ (138,915) $ 36 Depreciation $ (60,000) $ (60,000) $ (60,000) $ (60,000) $ 37 EBIT $ 20,000 $ 24,000 $ 28,200 $ 32,610 $ 38 Taxes $ (4,200) $ (5,040) $ (5,922) $ (6,848) $ Net Income $ 15,800 $ 18,960 $ 22,278 $ 25,762 $ 40 41 Add back Depreciation $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 243,101 (145,861) (60,000) 37,241 (7,821) 29,420 39 60,000 42 $ 85,800 $ 78,960 $ 82,278 $ 85,762 $ 89,420 43 Total Operating Cash Flow 44 45 Terminal: 46 1) Change in net WC 47 2) Salvage value (after tax) $ $ $ Salvage Value Before Tax (1-T) $ $ 20,000 11,850 B D E F G H $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 40 41 Add back Depreciation 42 43 Total Operating Cash Flow $ 85,800 $ 78,960 $ 82,278 $ 85,762 $ 89,420 44 $ 45 Terminal: 46 1) Change in net WC 47 2) Salvage value (after tax) Total $ $ Salvage Value Before Tax (1-T) $ $ $ 20,000 11,850 31,850 48 49 50 56 58 Project Net Cash Flows $ (174,200) $ 78,960 $ 82,278 $ 85,762 $ 121,270 51 52 NPV = $112.843.47 IRR = 35.3% Payback= 53 54 Q#1 Would you accept the project based on NPV, IRR? 55 Would you accept the project based on Payback rule if project cut-off is 3 years? 57 Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions 59 (a) 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 accept or reject the project? 62 (b) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 64 Q#3 How would you explain to your CEO what NPV means? 65 Q#4 What are advantages and disadvantages of using only Payback method? 66 Q#5 What are advantages and disadvantages of using NPV versus IRR? 67 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? 60 61 63 68 69 G H 200,000 5% (120,000) -60% (60,000) 21% 10% CF4 4 A E F TU 11 1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 12 2) New equipment cost $ (200,000) 9) Sales increase per year 13 3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) $ 14 4) Related start up cost $ (5,000) (as a percent of sales in Year 1) 15 5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR $ 16 6) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 17 7) Equip. salvage value before tax $ 15,000 13) Cost of Capital (Discount Rate) 18 19 20 21 ESTIMATING Initial Outlay (Cash Flow, CFO, T=0) 22 23 CFO CF1 CF2 CF3 24 Year 0 1 2 3 25 Investments: 26 1) Equipment cost $ (200,000) 27 2) Shipping and Install cost $ (35,000) 28 3) Start up expenses $ (5,000) 29 Total Basis Cost (1+2+3) $ (240,000) 30 4) Net Working Capital $ (20,000) 31 Total Initial Outlay $ (260,000) 32 33 Operations: 34 Revenue $ 200,000 $ 210,000 $ 220,500 $ 231,525 $ 35 Operating Cost $ (120,000) $ (126,000) $ (132,300) $ (138,915) $ 36 Depreciation $ (60,000) $ (60,000) $ (60,000) $ (60,000) $ 37 EBIT $ 20,000 $ 24,000 $ 28,200 $ 32,610 $ 38 Taxes $ (4,200) $ (5,040) $ (5,922) $ (6,848) $ Net Income $ 15,800 $ 18,960 $ 22,278 $ 25,762 $ 40 41 Add back Depreciation $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 243,101 (145,861) (60,000) 37,241 (7,821) 29,420 39 60,000 42 $ 85,800 $ 78,960 $ 82,278 $ 85,762 $ 89,420 43 Total Operating Cash Flow 44 45 Terminal: 46 1) Change in net WC 47 2) Salvage value (after tax) $ $ $ Salvage Value Before Tax (1-T) $ $ 20,000 11,850 B D E F G H $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 40 41 Add back Depreciation 42 43 Total Operating Cash Flow $ 85,800 $ 78,960 $ 82,278 $ 85,762 $ 89,420 44 $ 45 Terminal: 46 1) Change in net WC 47 2) Salvage value (after tax) Total $ $ Salvage Value Before Tax (1-T) $ $ $ 20,000 11,850 31,850 48 49 50 56 58 Project Net Cash Flows $ (174,200) $ 78,960 $ 82,278 $ 85,762 $ 121,270 51 52 NPV = $112.843.47 IRR = 35.3% Payback= 53 54 Q#1 Would you accept the project based on NPV, IRR? 55 Would you accept the project based on Payback rule if project cut-off is 3 years? 57 Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions 59 (a) 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 accept or reject the project? 62 (b) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? 64 Q#3 How would you explain to your CEO what NPV means? 65 Q#4 What are advantages and disadvantages of using only Payback method? 66 Q#5 What are advantages and disadvantages of using NPV versus IRR? 67 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? 60 61 63 68 69