10-Estimating Project Cash Flow_b

10-Estimating Project Cash Flow_b - Estimating Project Free...

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Estimating Project Free Cash Flow
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Cash Flows Discount Rate Bonds Coupons Face Value YTM Stocks Perpetual Dividends R Equity Firms Free Cash Flow R Firm WACC Projects Incremental Free Cash Flow R Project Valuation 1 [ ] (1 ) N t t t E CF Market Value PV r
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Use Cash Flow, not Earnings Adjust for: Depreciation Changes in Net Working Capital Capital Expenditures Do not include financing costs Examine investment decisions independent of how they are financed Project Cash Flows Reminders
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Free Cash Flow
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When examining projects , it is incremental cash flow that is relevant. Sunk Costs Opportunity Costs Externalities / Spillover Effects Overhead Allocation What is Different?
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What is Different? 6
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The Cold and Sweet (C&S) Company manufactures ice cream bars. They are considering the purchase of a new machine that will top the bar with high quality chocolate. The details are: Machine Cost is $900,000. Machine is depreciated straight-line for 10 years to zero salvage. However, C&S expects to sell the machine in 5 years for $100,000. Marketing promotion of $30,000 during the first year and $10,000 each of the remaining four years. They expect to sell 400,000 bars at $1.40 each. Variable cost is estimated at $0.50 each and fixed costs are $40,000 per year.
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