ch 12 - Cash Flow Estimation and Risk Analysis Chapter 12 ...

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Unformatted text preview: Cash Flow Estimation and Risk Analysis Chapter 12 § Relevant Cash Flows § Incorporating Inflation § Types of Risk § Risk Analysis 112-1 Proposed Project § Total depreciable cost § Equipment: $200,000 § Shipping and installation: $40,000 § Changes in working capital § Inventories will rise by $25,000 § Accounts payable will rise by $5,000 § Effect on operations § New sales: 100,000 units/year @ $2/unit 212-2 Proposed Project § Life of the project § Economic life: 4 years § Depreciable life: MACRS 3-year class § Salvage value: $25,000 § Tax rate: 40% § WACC: 10% 312-3 Determining Project Value § Estimate relevant cash flows § Calculating annual operating cash flows. § Identifying changes in working capital. § Calculating terminal cash flows: after-tax salvage value and return of NWC. 412-4 Initial OCF1 OCF2 OCF3 OCF4 Costs + Terminal CFs NCF0 NCF1 NCF2 NCF3 NCF4 1 2 3 4 Initial Year Net Cash Flow § Find NWC. §  in inventories of $25,000 § Funded partly by an  in A/P of $5,000 § & NWC = $25,000 – $5,000 = $20,000 § Combine @NWC with initial costs. Equipment -$200,000 Installation -40,000 512-5 Determining Annual Year Rate x Basis Deprec. 1 0.33 x $240 $ 79 2 0.45 x 240 108 3 0.15 x 240 36 4 0.07 x 240 17 1.00 $240 Due to the MACRS ½-year convention, a 3-year asset is depreciated over 4 years. 612-6 Annual Operating Cash Flows 1 2 3 4 Revenues 200.0 200.0 200.0 200.0 – Op. costs-120.0-120.0-120.0-120.0 – Deprec. expense -79.2-108.0 -36.0 -16.8 Operating income (BT) 0.8-28.0 44.0 63.2 – Tax (40%) 0.3 -11.2 17.6 25.3 Operating income (AT) 0.5-16.8 26.4 37.9 + Deprec. expense 79.2 108.0 36.0 16.8 Operating CF 79.7 91.2 62.4 54.7 712-7 Terminal Cash Flow Q. How is NWC recovered? Q. Is there always a tax on SV? 812-8 Recovery of NWC $20,000 Salvage value 25,000 Tax of SV (40%) -10,000 Terminal CF $35,000 Should financing effects be § No, dividends and interest expense should not be included in the analysis. § Financing effects have already been taken into account by discounting cash flows at the WACC of 10%....
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ch 12 - Cash Flow Estimation and Risk Analysis Chapter 12 ...

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