chap12 - Chapter 12 Cash Flow Estimation and Other Issues...

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Cash Flow Estimation and Other Issues in Capital Budgeting (thru page 398 plus 406-7) plus Appendices 12-A and 12-B Chapter 12
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Overview Cash Flow Estimation New or Expansion Project Other Cash Flow Estimation Issues Replacement Project
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Capital Budgeting Steps For a potential project: 1. Forecast the project cash flows. 2. Estimate the cost of capital 3. Discount the future cash flows at the cost of capital. 4. Find NPV of project = PV of future cash flows – required investment, and accept if NPV > 0.
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Cash Flow Estimation Need to estimate incremental after tax incremental after tax cash flows cash flows that the project is expected to generate. General form: Cash Flow = Incremental Net Income + Depreciation Other “special” cash flows Initial costs Extra ending or terminal cash flows at the end of the project’s expected useful life.
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Incremental Cash Flows IMPORTANT IMPORTANT Ask yourself this question Would the cash flow still exist if the project does not exist? If yes, do not include it in your analysis. If no, include it.
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Secret Documents from Jelly Donut. The Sun  Blocker Project: What was Mr. Burns thinking? In planning construction of the Sun Blocker, my engineers and I determined that the Sun Blocker would cost $50 million to build today (t=0). The estimated useful life for Sun Blocker is 3 years with no expected salvage value at the end of the project’s useful life. My assistant, Smithers, thought Sun Blocker’s cost wouldn’t qualify for annual depreciation write offs due to its nefarious nature. “Pish- posh” I said, ordering Smithers to look into this matter further. After further research, Smithers reports that Sun Blocker qualifies for the 3-year MACRS depreciation class. Smithers also reports that the marketing department spent $1 million commissioning a electricity demand sensitivity analysis for the project. I fire the entire department and replace them with that Simpson chap since he always seems deep in thought.
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Sun Blocker Info One of my underlings from the collections department
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chap12 - Chapter 12 Cash Flow Estimation and Other Issues...

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