Cash Flow Analysis ppt

Cash Flow Analysis ppt - 7-1 CHAPTER 7 Cash Flow Estimation...

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7 - 1 Copyright © 1999 by The Dryden Press n Relevant cash flows n Working capital treatment n Unequal project lives n Abandonment value n Inflation CHAPTER 7 Cash Flow Estimation
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7 - 2 Copyright © 1999 by The Dryden Press n Cost: $200,000 + $10,000 shipping + $30,000 installation. n Depreciable cost $240,000. n Inventories will rise by $25,000 and payables will rise by $5,000. n Economic life = 4 years. n Salvage value = $25,000. n MACRS 3-year class. Proposed Project
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7 - 3 Copyright © 1999 by The Dryden Press n Incremental net revenues = $125,000. n Tax rate = 40%. n Overall cost of capital = 10%.
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7 - 4 Copyright © 1999 by The Dryden Press 0 1 2 3 4 Initial Outlay OCF1 OCF2 OCF3 OCF4 + Terminal CF NCF0 NCF1 NCF2 NCF3 NCF4 Set up without numbers a time line for the project CFs.
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7 - 5 Copyright © 1999 by The Dryden Press = Corporate cash flow with project minus Corporate cash flow without project Incremental Cash Flow
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7 - 6 Copyright © 1999 by The Dryden Press n NO. The costs of capital are already incorporated in the analysis since we use them in discounting. n If we included them as cash flows, we would be double counting capital costs. Should CFs include interest expense? Dividends?
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7 - 7 Copyright © 1999 by The Dryden Press n NO. This is a sunk cost . Focus on incremental investment and operating cash flows. Suppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis?
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7 - 8 Copyright © 1999 by The Dryden Press n 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. n A.T. opportunity cost = $25,000 (1 - T) = $15,000 annual cost. Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?
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7 - 9 Copyright © 1999 by The Dryden Press n Yes. The effects on the other projects’ CFs are “externalities” . n Net CF loss per year on other lines would be a cost to this project. n Externalities will be positive if new projects are complements to existing assets, negative if substitutes. If the new product line would decrease sales of the firm’s other products by $50,000 per year, would this affect the analysis?
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Copyright © 1999 by The Dryden Press Net Investment Outlay at t = 0 (000s) Equipment Freight + Inst. Change in
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Cash Flow Analysis ppt - 7-1 CHAPTER 7 Cash Flow Estimation...

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