LEC2.docx - LEC2 cash flows and capital budgeting Change in cash flows as a result of decision to undertake the project i.e how do my cash flows change

LEC2.docx - LEC2 cash flows and capital budgeting Change in...

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LEC2: cash flows and capital budgeting Change in cash flows as a result of decision to undertake the project i.e. how do my cash flows change if I undertake the project NPV – the best method because it takes into account the risk, size and timing of cash flows IRR – Also good, but for non-normal cash flow you can get two answers with this method - Independent project: you can choose any project because nothing is linked or dependent on each other - Mutually exclusive: you have to pick between the projects and can only chose one e.g. if you have land you can either chose to build a house or a building Pay-back period – the measure is arbitrary, kinda useless Discounted pay-back period – its and okay method, tell us when we will reach a 0 NPV ARR - not the best method either Calculating project cash flows - Incremental after tax cash flows: we take into account tax - The formula: Revenue – operation expense = earnings before interest, taxation, depreciation, amortization (EBITDA) EBITDA – Depreciation and amortization = Earnings before interest and taxation (EBIT) EBIT x (1 –tc) = Net operating profit after tax (NOPAT) Remember: working capital is what the business pays, it gets added onto the capital expense because that total is the cash outflow
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NOPAT + D&A = Cash flow from operations (CF Opns) CF opns – capital expenditure (Cap EXP) – increases in working capital
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  • Spring '17
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