Question

1. Understand how to use EXCEL Spreadsheet
(a)  Develop proforma 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%
ESTIMATING  Initial Outlay (Cash Flow, CFo, T= 0)
			CF0	CF1	CF2	CF3	CF4
Year			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
Total Initial Outlay
Operations:
Revenue
Operating Cost
Depreciation
EBIT
Taxes
Net Income
Add back  Depreciation
Total Operating Cash Flow				XXXXX	XXXXX	XXXXX	XXXXX
Terminal:
1) Change in net WC				$-	$-	$-	$20,000
2) Salvage value (after tax)			Salvage Value Before Tax (1-T)				XXXXX
Total							XXXXX
Project Net Cash Flows			$-	$-	$-	$-	$
NPV =			IRR =			Payback=
Q#1	Would you accept the project based on NPV, IRR?
	Would you accept the project based on Payback rule if project cut-off
	is 3 years?
Q#2     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 reject the project?
( b)	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? *****SHOW WORK PLEASE !!!!

Answer 1

		Revenue in year 2		210000	(200000*1.05)
		Revenue in year 3		220500	(210000*1.05)
		Revenue in year 4		231525	(220500*1.05)
		ESTIMATING  Initial Outlay (Cash Flow, CFo, T= 0)
					CF0	CF1	CF2	CF3	CF4
	N	Year			0	1	2	3	4
		Investments:
		1) Equipment cost			($200,000)
		2) Shipping and Install cost			($35,000)
		3) Start up expenses			($5,000)
		Total Basis Cost (1+2+3)			($240,000)
		4)  Net Working Capital(25000-5000)			($20,000)
	A	Total Initial Outlay			($260,000)
		Operations:
	B	Revenue				$200,000	$210,000	$220,500	$231,525
	C=0.6*B	Operating Cost				$120,000	$126,000	$132,300	$138,915
	D=(240000/4)	Depreciation				$60,000	$60,000	$60,000	$60,000
	E=B-C-D	EBIT				$20,000	$24,000	$28,200	$32,610
	F=E*0.21	Taxes				$4,200	$5,040	$5,922	$6,848
	G=E-F	Net Income				$15,800	$18,960	$22,278	$25,762
	D	Add back  Depreciation				$60,000	$60,000	$60,000	$60,000
	H=G+D	Total Operating Cash Flow				$75,800	$78,960	$82,278	$85,762
		Terminal:
	I	1) Change in net WC				$-	$-	$-	$20,000
	J=15000*(1-0.21)	2) Salvage value (after tax)			Salvage Value Before Tax (1-T)				$     11,850
	K=H+I+J	Total				$75,800	$78,960	$82,278	$117,612
	L=A+K	Project Net Cash Flows			($260,000)	$75,800	$78,960	$82,278	$117,612
		Cumulative Cash Flow			($260,000)	($184,200)	($105,240)	($22,962)	$94,650
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=10%=0.1
		N=Year of Cash Flow
										SUM
	PV=L/(1.1^N)	Present Value of Cash Flow			$       (260,000)	$      68,909	$        65,256	$ 61,817	$       80,331	$ 16,312
	NPV	Net Present Value=Sum of PV of cash flows		$ 16,312
		Payback Period= Period at which cumulative cash flow=Zero
		Payback Period	3.20	Years	(3+(22962/117612)
	IRR	Internal Rate of Return	12.67%	(Using IRR function of excel over the Projected Net Cash Flows)
		Based on NPV, Project is accepted		NPV is Positive
		Based on IRR, Project is accepted		IRR is higher than the cost of capital
		Project is not acceptable if required payback period is 3 years