Capital Budgeting Risk Analysis Project Instruction Create thepro forma income statement and estimate the cash flows for thefollowing project. Decide whether to accept this project based onanalysis of the NPV, Profitability Index, and IRR. ProjectAssumptions (Base Case) Equipment Life 6 Years Initial EquipmentCost $2,500,000 in year 0 Depreciation Straight Line Method InitialRevenue $1,000,000 in year 1 Revenue growth rate year 2 10% Revenuegrowth rate year 3 15% Revenue growth rate year 4 10% Revenuegrowth rate year 5 5% Variable Costs 60% of this year's revenueFixed Costs $75,000 in year 1 Fixed Costs Inflation Rate 3% peryear Long-term growth rate 2% per year Net Working Capital 4% ofnext year's revenue Tax Rate 35% Discount Rate 18% Model StructureSince this project does not have an end date we need to decide howmany years of detailed analysis we will conduct. For thisassignment, we will estimate detailed cash flows for 5 years andestimate the terminal value at the end of year 5. The IncomeStatement is the building block for cash flow estimation. Yourincome statement should contain the following items. You mayinclude additional items if you find them useful in your model.Revenue Variable Cost Gross Profit Cash Fixed Cost DepreciationEBIT (Earnings Before Interest and Tax) Tax Net Income Cash Flows:• Operating Cash Flow = EBIT + Depreciation – Taxes • Other cashflow items o initial investment o change in Net Working Capital oTerminal value ? Analyses 1. Scenario Analysis: prepare a scenariosummary report. Use the values in the original assumption as thebase case and add the following two cases. Case 1 (worst case)Variable Costs 65% of this year's revenue Fixed Costs $80,000 inyear 1 Fixed Costs Inflation Rate 5% per year Long-term growth rate1% per year Case 2 (best case) Variable Costs 55% of this year'srevenue Fixed Costs $70,000 in year 1 Fixed Costs Inflation Rate 3%per year Long-term growth rate 3% per year 2. Sensitivity Analysis:prepare a one-way data table. Make sure to use the base casevalues. Allow the long-term growth rate to vary from -3.0% to +3.0%in increments of 0.5%. Show the impact on NPV and IRR. 3. BreakevenAnalysis: identify the initial revenue level that will result in $0NPV. Things to turn in: 1. A one-page memo explaining the resultsof your analysis and your recommendation. The memo should includeimportant results of your analysis such as a summary table orgraph. The memo is limited to one page so be very selective on whatinformation to include. 2. An Excel spreadsheet showing thefollowing: • Entire model for the base case • Scenario Analysis(Scenario Summary Report) • Sensitivity Analysis (Data Table) •Breakeven Analysis (Goal Seek result) Check Figures (Base case):Model Year 0 1 5 6 Pro Forma Incremental Income Statement Revenue1,000,000 1,461,075 1,490,297 Net Income (59,583) 54,178 Pro FormaIncremental Balance Sheet Net Working Capital 40,000 44,000 59,612Pro Forma Incremental Cash Flows Total Net AT CF (2,540,000)353,083 3,463,856