ONLY THE QUESTIONS NEEDS TO BE ANSWERED THE TOP PORTION WHICH IS CAPITAL BUDGETING IS ALREADY COMPLETED.
Tax rate 35% Capital Budgeting DecisionsPRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) INSTRUCTOR: Dr. Hon-Jen Abraham LinYousuf HayatFINC 3310Section 1NTBYear 2020 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem-Solving and Critical Thinking Skills 1) Life Period of the Equipment = 4 years8) Sales for first year (1)$ 200,000 2) New equipment cost$ (950,000)9) Sales increase per year1% 3) Equipment ship & install cost$ (35,000)10) Operating cost:$ (120,000) 4) Related start up cost$ (5,000)(60 Percent of Sales)-60% 5) Inventory increase$ 25,00011) Depreciation (Straight Line)/YR$ 247,500 6) Accounts Payable increase$ 5,00012) Tax rate35% 7) Equip. Salvage Value Estimated$ 15,00013) Cost of Capital (WACC)10% End of Year 4(fully depreciated ) ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0) YEARCF0CF1CF2CF3CF4 01234 Investments: 1) Equipment cost$ (950,000) 2) Shipping and Install cost$ (35,000) 3) Start up expenses$ (5,000) Total Basis Cost (1+2+3)$ (990,000) 4) Net Working Capital Inventory Inc.- Acct. Payable Inc.$ (20,000)$ - 0$ - 0$ - 0$ - 0 Total Initial Outlay$ (1,010,000) Operations: Revenue$ 200,000$ 202,000$ 204,020$ 206,060 Operating Cost$ (120,000)$ (121,200)$ (122,412)$ (123,636) Depreciation$ (247,500)$ (247,500)$ (247,500)$ (247,500) EBIT$ (167,500)$ (166,700)$ (165,892)$ (165,076) Taxes$ (58,625)$ (58,345)$ (58,062)$ (57,777) Net Income (LOSS)$ (108,875)$ (108,355)$ (107,830)$ (107,299) TAX SHIELD DUE TO LOSS Add back Depreciation$ 247,500$ 247,500$ 247,500$ 247,500 Total Operating Cash Flow$ 138,625$ 139,145$ 139,670$ 140,201 Terminal (END of 4th YEAR) 1) Release of Working Capital$ - 0$ - 0$ - 0$ 20,000 2) Salvage value (after tax)$ 9,750 Total$ 29,750 Project Net Cash Flows$ (1,010,000)$ 138,625$ 139,145$ 139,670$ 169,951 NPV =($547,967)IRR =-18.1%Payback=Never Payback COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% Q#1Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off period is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions (a)Estimate NPV, IRR and Payback Period of the project if Marginal Corporate Tax is reduced to 20%. Would you accept or reject the project? Assume Straight-Line Depreciation. (b)Estimate NPV, IRR and Payback Period of the project if Equipment is fully depreciated in first year and tax rate is reduced to 20%. Would you accept or reject the project? ( c)As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 What are advantages and disadvantages of using only Payback method? Tax rate 20% Capital Budgeting DecisionsPRINCIPLES OF FINANCIAL MANAGEMENT GROUP PROJECT (FINC 3310) INSTRUCTOR: Dr. Hon-Jen Abraham LinYousuf HayatFINC 3310Section 1NTBYear 2020 1. Learning Objectives (a) Develop proforma Project Income Statement Using Excel Spreadsheet (b) Compute Net Project Cash flows, NPV, IRR and PayBack Period (c) Develop Problem-Solving and Critical Thinking Skills 1) Life Period of the Equipment = 4 years8) Sales for first year (1)$ 200,000 2) New equipment cost$ (950,000)9) Sales increase per year1% 3) Equipment ship & install cost$ (35,000)10) Operating cost:$ (120,000) 4) Related start up cost$ (5,000)(60 Percent of Sales)-60% 5) Inventory increase$ 25,00011) Depreciation (Straight Line)/YR$ 247,500 6) Accounts Payable increase$ 5,00012) Tax rate20% 7) Equip. Salvage Value Estimated$ 15,00013) Cost of Capital (WACC)10% End of Year 4(fully depreciated ) ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0) YEARCF0CF1CF2CF3CF4 01234 Investments: 1) Equipment cost$ (950,000) 2) Shipping and Install cost$ (35,000) 3) Start up expenses$ (5,000) Total Basis Cost (1+2+3)$ (990,000) 4) Net Working Capital Inventory Inc.- Acct. Payable Inc.$ (20,000)$ - 0$ - 0$ - 0$ - 0 Total Initial Outlay$ (1,010,000) Operations: Revenue$ 200,000$ 202,000$ 204,020$ 206,060 Operating Cost$ (120,000)$ (121,200)$ (122,412)$ (123,636) Depreciation$ (247,500)$ (247,500)$ (247,500)$ (247,500) EBIT$ (167,500)$ (166,700)$ (165,892)$ (165,076) Taxes$ (33,500)$ (33,340)$ (33,178)$ (33,015) Net Income (LOSS)$ (134,000)$ (133,360)$ (132,714)$ (132,061) TAX SHIELD DUE TO LOSS Add back Depreciation$ 247,500$ 247,500$ 247,500$ 247,500 Total Operating Cash Flow$ 113,500$ 114,140$ 114,786$ 115,439 Terminal (END of 4th YEAR) 1) Release of Working Capital$ - 0$ - 0$ - 0$ 20,000 2) Salvage value (after tax)$ 12,000 Total$ 32,000 Project Net Cash Flows$ (1,010,000)$ 113,500$ 114,140$ 114,786$ 147,439 NPV =($625,544)IRR =-23.0%Payback=Never Payback COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10% Q#1Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule if project cut-off period is 3 years? Q#2 SENSITIVITY and SCENARIO ANALYIS. Capital Budgeting (Investment ) Decisions (a)Estimate NPV, IRR and Payback Period of the project if Marginal Corporate Tax is reduced to 20%. Would you accept or reject the project? Assume Straight-Line Depreciation. (b)Estimate NPV, IRR and Payback Period of the project if Equipment is fully depreciated in first year and tax rate is reduced to 20%. Would you accept or reject the project? ( c)As a CFO of the firm, which of the above two scenario (a) or (b) would you choose? Why? Q#3 What are advantages and disadvantages of using only Payback method?