ch 12

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

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Unformatted text preview: Cash Flow Estimation and Risk Analysis Chapter 12 Â§ Relevant Cash Flows Â§ Incorporating Inflation Â§ Types of Risk Â§ Risk Analysis 112-1 Proposed Project Â§ Total depreciable cost Â§ Equipment: \$200,000 Â§ Shipping and installation: \$40,000 Â§ Changes in working capital Â§ Inventories will rise by \$25,000 Â§ Accounts payable will rise by \$5,000 Â§ Effect on operations Â§ New sales: 100,000 units/year @ \$2/unit 212-2 Proposed Project Â§ Life of the project Â§ Economic life: 4 years Â§ Depreciable life: MACRS 3-year class Â§ Salvage value: \$25,000 Â§ Tax rate: 40% Â§ WACC: 10% 312-3 Determining Project Value Â§ Estimate relevant cash flows Â§ Calculating annual operating cash flows. Â§ Identifying changes in working capital. Â§ 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 Â§ Find NWC. Â§ &#2; in inventories of \$25,000 Â§ Funded partly by an &#2; in A/P of \$5,000 Â§ & NWC = \$25,000 â€“ \$5,000 = \$20,000 Â§ 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 Â½-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 â€“ Op. costs-120.0-120.0-120.0-120.0 â€“ Deprec. expense -79.2-108.0 -36.0 -16.8 Operating income (BT) 0.8-28.0 44.0 63.2 â€“ 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 Â§ No, dividends and interest expense should not be included in the analysis. Â§ Financing effects have already been taken into account by discounting cash flows at the WACC of 10%....
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## This note was uploaded on 02/09/2010 for the course BUS 101 taught by Professor Noname during the Spring '10 term at KCTCS.

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

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