(a) Develop pro-forma Income Statement Using Excel Spreadsheet
(b) Compute Net Project Cashflows, NPV, and IRR
(c) Develop problem-solving and critical thinking skills and make long-term investment decisions
1) Life Period of the Equipment = 4 years 8) Sales for first year (1) $ 200,000
2) New equipment cost $(200,000) 9) Sales increase per year 5%
3) Equipment ship & install cost $ (35,000) 10) Operating cost (60% of Sales) $ (120,000)
4) Related start up cost $ (5,000) (as a percent of sales in Year 1) -60%
5) Inventory increase $ 25,000 11) Depreciation (Straight Line)/YR $ (60,000)
6) Accounts Payable increase $ 5,000 12) Marginal Corporate Tax Rate (T) 21%
7) Equip. salvage value before tax $ 15,000 13) Cost of Capital (Discount Rate) 10%
Income Statement
Revenue
Operating Cost
Depreciation
DEBIT
Taxes
Net Income
YEAR CF0 CF1 CF2 CF3 CF4
0 1 2 3 4
1) Operating Cash Flow
2) Change in NWC
3) Capital spending
Total
Project Net Cash Flows
NPV = IRR = Payback=
Q#1 Would you accept the project based on NPV, IRR?
Q#2 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Would you accept the project based on Payback rule if project cut-off is 3 years?
Q#3 Impact of 2017 Tax Cut Act on Net Income, Cash Flows and Capital Budgeting (Investment ) Decisions
(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 rejec the project?
(b) As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why?
Q#4 How would you explain to your CEO what NPV means?
Q#5 What are advantages and disadvantages of using only Payback method?
Q#6 What are advantages and disadvantages of using NPV versus IRR?
ScholarMatic: Explanation & Answer
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