Question

(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			$ (200,000)	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			$    (60,000)
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
2) Shipping and Install cost
3) Start up expenses
Total Basis Cost (1+2+3)
4) Net Working Capital
Inventory Inc.- Acct. Payable Inc.			$     (20,000)	$                   -	$                  -	$          -	$              -
Total Initial Outlay
Operations:
Revenue
Operating Cost
Depreciation
EBIT
Taxes
Net Income (LOSS)				XXXXXX	XXXXX	XXXXX	XXXXX
TAX SHIELD DUE TO LOSS
Add back Depreciation
Total Operating Cash Flow				XXXXX	XXXXX	XXXXX	XXXXX
Terminal (END of 4th YEAR)
1) Release of Working Capital				$                   -	$                  -	$          -	$     20,000
2) Salvage value (after tax)
Total							XXXXXX
Project Net Cash Flows			$               -	$                   -	$                  -	$          -	$
NPV =			IRR =			Payback=
COST of CAPITAL (WACC) or DISCOUNT RATE OF THE PROJECT = 10%
Q#1	Would 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   How would you explain to your CEO what NPV means?
Q#4   What are advantages and disadvantages of using only Payback method?
Q#5   What are advantages and disadvantages of using NPV versus IRR?
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?

Answer 1

I have solved the problem in excel and have indicated the answers. Please use the formulas mentioned to arrive at the answer.