ACCT-311 Lecture Notes - Lecture 2: Opportunity Cost, Cash Flow, Net Present Value
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25 Mar 2016
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1. Understand how to use EXCEL Spreadsheet | |||||||
(a) Develop proforma Income Statement Using ExcelSpreadsheet | |||||||
(b) Compute Net Project Cashflows,NPV, and IRR | |||||||
(c) Developproblem-solving and critical thinking skills | |||||||
and make long-term investment decisions | |||||||
1) LifePeriod of the Equipment = 4 years | 8) Sales for first year (1) | $200,000 | |||||
2) Newequipment 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) Relatedstart 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) AccountsPayable 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) Shippingand Install cost | |||||||
3) Start upexpenses | |||||||
Total Basis Cost (1+2+3) | |||||||
4) Net Working Capital | |||||||
Total Initial Outlay | |||||||
Operations: | |||||||
Revenue | |||||||
OperatingCost | |||||||
Depreciation | |||||||
EBIT | |||||||
Taxes | |||||||
Net Income | |||||||
Addback Depreciation | |||||||
Total Operating Cash Flow | XXXXX | XXXXX | XXXXX | XXXXX | |||
Terminal: | |||||||
1) Changein net WC | $- | $- | $- | $20,000 | |||
2) Salvagevalue (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 projectcut-off | |||||||
is 3years? | |||||||
Q#2 Impact of 2017 Tax Cut Acton Net Income, Cash Flows and | |||||||
Capital Budgeting (Investment ) Decisions | |||||||
(a) | Estimate NPV, IRR and Payback Period of the project if equipment isfully | ||||||
depreciated in first year and tax rate equalsto 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 CEOwhat NPV means? | |||||||
Q#4 What are advantages anddisadvantages of using only Payback method? | |||||||
Q#5 What are advantages and disadvantages of usingNPV versus IRR? | |||||||
Q#6 Explain the difference between independent projectsand mutually exclusive projects. | |||||||
When you are confronted with Mutually Exclusive Projects and havecoflicts | |||||||
with NPV and IRR results, which criterion would you use (NPV orIRR) and why? *****SHOW WORK PLEASE !!!! |