2.2 Stud%20Week%207%20Lect%202%20Capital%20Budgeting%20Techniques%20rev%20.ppt

2.2 Stud%20Week%207%20Lect%202%20Capital%20Budgeting%20Techniques%20rev%20.ppt

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    Capital Budgeting  Techniqes Week 7 Lecture 2
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    Project Classifications 1) Independent projects projects whose cash flows are  not affected  by the  acceptance or rejection of other projects 2) Mutually exclusive projects a set of projects where the acceptance of one project  means the others  cannot be  accepted
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    3)  Replacement decisions decisions to determine whether to purchase capital  assets to  take the place of existing assets to maintain  existing operations 4) Expansion decisions decisions to determine whether to  purchase  capital  projects and  add them to existing  assets to  increase   existing operations Project Classifications
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    Cash Flow Estimation Cash is different from accounting profits Only consider cash flows after taxes Only incremental cash flows are relevant to the  accept/reject decision the change in a firm’s net cash flow attributable to an  investment project
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    Example GAAP   Tax Stmt  Actual CF Sales $50.0     $50.0   $50.0       36.0     36.0 Depreciation EBT Taxes (40%) Net Income          Actual Cash Flow
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    Cash Flow vs. Accounting Income Discount actual cash flows Using accounting income, rather than cash flow,  could lead to erroneous decisions. Example A project costs $2,000 and is expected to last 2 years, producing cash income of $1,500 and $500 respectively. The cost of the project can be depreciated at $1,000 per year. Given a 10% required return, compare the NPV using cash flow to the NPV using accounting income.
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    Year 1 Year 2 Cash Income $1500 $ 500 Depreciation -$1000 -$1000 Accounting Income Cash Flow vs. Accounting Income
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This note was uploaded on 12/23/2009 for the course BCOM FINC 201 taught by Professor Debrak.reed during the Spring '09 term at Canterbury.

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2.2 Stud%20Week%207%20Lect%202%20Capital%20Budgeting%20Techniques%20rev%20.ppt

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