(a) Develop pro-forma Income Statement Using Excel Spreadsheet (b) Compute Net Project Cashflows, NPV, and IRR (c) Develop problem-solving and

(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?