FINANCE - CAPITAL BUDGETING EXCEL PROJECT
Fauver Family Funhouses (FFF) is faced with two mutually exclusive investments at time 0. The initial investments required and yearly savings before depreciation and taxes are shown below (i.e. these are before-tax cash flows). Assume a tax rate of 34%.
|
Project
|
ICO
(Year 0)
|
End of Year Cash Flows
|
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
A
|
$14,500
|
$4,500
|
$4,500
|
$4,500
|
$4,500
|
$4,500
|
$4,500
|
$4,500
|
|
B
|
$9,000
|
$2,500
|
$2,500
|
$3,000
|
$3,000
|
$3,500
|
$3,500
|
$3,500
|
Under MACRS both assets fall in the 5-year property class and the depreciation percentages are:
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
MACRS depreciation %s
|
20.00
|
32.00
|
19.20
|
11.52
|
11.52
|
5.76
|
0
|
1. In Excel, calculate the after-tax incremental operating cash flows for Years 0 through 7 for each project.
2. In Excel, using the after-tax cash flows from (1) above, and assuming a required rate of return of 8.5 percent, determine for each project:
a. Payback Period
b. Net Present Value
c. Profitability Index
d. Internal Rate of Return
3. Which project, if any, should Fauver Family Funhouses accept and why?