Sheet1Capital Budgeting DecisionsINSTRUCTOR:1. Learning Objectives(a) Develop proforma Project Income Statement Using Excel Spreadsheet(b) Compute Net Project Cash flows, NPV, IRR...

Sheet1
    Capital Budgeting Decisions
    INSTRUCTOR:
    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 years                8) Sales for first year (1)            $ 200,000
    2) New equipment cost            $ (223,500)    9) Sales increase per year            5%
    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            $ 25,000    11) Depreciation (Straight Line)/YR            $ 69,625
    6) Accounts Payable increase            $ 5,000    12) Tax rate            35%
    7) Equip. Salvage Value Estimated            $ 15,000    13) Cost of Capital (WACC)            10%
    End of Year 4    (fully depreciated )
    ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0)
    YEAR            CF0    CF1    CF2    CF3    CF4
                0    1    2    3    4
    Investments:
    1) Equipment cost            $ (223,500)
    2) Shipping and Install cost            $ (35,000)
    3) Start up expenses            $ (5,000)
    Total Basis Cost (1+2+3)            $ (263,500)
    4) Net Working Capital
    Inventory Inc.- Acct. Payable Inc.            $ (20,000)    $ - 0    $ - 0    $ - 0    $ - 0
    Total Initial Outlay            $ (283,500)
    Operations:
    Revenue                $ 200,000    $ 210,000    $ 220,500    $ 231,525
    Operating Cost                $ 120,000    $ 126,000    $ 132,300    $ 138,915
    Depreciation                $ 69,625    $ 69,625    $ 69,625    $ 69,625
    EBIT                $ 10,375    $ 14,375    $ 18,575    $ 22,985
    Taxes                $ 3,631    $ 5,031    $ 6,501    $ 8,045
    Net Income (LOSS)                $ 6,744    $ 9,344    $ 12,074    $ 14,940
    TAX SHIELD DUE TO LOSS
    Add back Depreciation                $ 69,625    $ 69,625    $ 69,625    $ 69,625
    Total Operating Cash Flow                $ 76,369    $ 78,969    $ 81,699    $ 84,565
    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            $ (283,500)    $ 76,369    $ 78,969    $ 81,699    $ 114,315
                    76,369    155,338    237,036    351,352
    NPV =    ($9,350)        IRR =    8.6%        Payback=    3.41
    COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10%
    Q#1    Would you accept the...