{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

IFM9 Ch 13 Show - CHAPTER 13 Capital Budgeting Estimating...

Info icon This preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
  1 CHAPTER 13 Capital Budgeting:  Estimating  Cash Flows and Analyzing Risk
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  2 Estimating cash flows: Relevant cash flows Working capital treatment Inflation Risk Analysis: Sensitivity Analysis,  Scenario Analysis, and Simulation  Analysis
Image of page 2
  3 Proposed Project $200,000 cost + $10,000 shipping +  $30,000 installation. Economic life = 4 years. Salvage value = $25,000. MACRS 3-year class.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  4 Annual unit sales = 1,250. Unit sales price = $200. Unit costs = $100. Net operating working capital (NOWC)  = 12% of sales. Tax rate = 40%. Project cost of capital = 10%.
Image of page 4
  5 Incremental Cash Flow for a  Project Project’s incremental cash flow is: Corporate cash flow with the project Minus  Corporate cash flow without the project.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  6 Treatment of Financing Costs Should you subtract interest expense or  dividends when calculating CF?  NO.  We discount project cash flows with a  cost of capital that is the rate of return  required by all investors (not just debtholders  or stockholders), and so we should discount  the total amount of cash flow available to all  investors.   They are part of the costs of capital.  If we  subtracted them from cash flows, we would  be double counting capital costs.
Image of page 6
  7 Sunk Costs Suppose $100,000 had been spent last year  to improve the production line site.  Should  this cost be included in the analysis? NO. This is a sunk cost.  Focus on  incremental investment and operating cash  flows.
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  8 Incremental Costs Suppose the plant space could be leased out  for $25,000 a year.  Would this affect the  analysis? Yes. Accepting the project means we will not  receive the $25,000.  This is an opportunity  cost and it should be charged to the project. A.T. opportunity cost = $25,000 (1 - T) =  $15,000 annual cost.
Image of page 8
  9 Externalities If the new product line would decrease sales  of the firm’s other products by $50,000 per  year, would this affect the analysis?  Yes. The effects on the other projects’ CFs  are “externalities”. Net CF loss per year on other lines would be  a cost to this project. Externalities will be positive if new projects  are complements to existing assets, negative  if substitutes.
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  10 What is the depreciation  basis? Basis = Cost + Shipping + Installation $240,000
Image of page 10
  11 Annual Depreciation Expense  (000s) Year %      X (Initial  Basis) = Depr. 1 0.33 $240 $79.2 2 0.45 108.0 3 0.15 36.0 4 0.07 16.8
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
  12 Annual Sales and Costs Year 1 Year 2 Year 3 Year 4 Units 1250 1250 1250 1250 Unit  Price $200 $206 $212.18 $218.55 Unit Cost $100 $103 $106.09 $109.27 Sales $250,000 $257,500 $265,225 $273,188 Costs $125,000 $128,750 $132,613 $136,588
Image of page 12
  13 Why is it important to include inflation  when estimating cash flows?
Image of page 13

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern