lecture14 - Making Capital Investment Decisions 1 Agenda...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Making Capital Investment Decisions 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Agenda Relevant Cash Flows Different Types of Costs and Benefits Pro Forma Financial Statements and Project Cash Flows The Role of Net Working Capital and Depreciation Project Valuation Examples 2
Background image of page 2
Relevant Cash Flows The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted Incremental cash flows – Any and all changes in the firm’s future cash flows that are a direct consequence of taking the project The stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Costs to Ignore / Consider Sunk costs – costs that have accrued in the past or that we have committed to and will occur regardless of our decision Should be ignored in our analysis Opportunity costs – costs of lost options Would the resource used by the project have value if it were sold or leased rather than used? For example, land that is already owned by the firm is not “free”; Its opportunity cost is equal to its market price. Should be considered in our analysis 4
Background image of page 4
Project Side Effects We should consider the effects of our decision on the cash flows of other projects of the firm Positive side effects – benefits to other projects For example, a reusable infrastructure, future profits from parts and services Negative side effects – costs to other projects For example, eroding sales of other products, depleting the brand name 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Variable vs. Fixed Costs Variable costs – costs that change when the quantity of output changes For example, labor and raw material Total variable costs = Quantity of output ×Cost per unit Fixed costs – costs that do not change when the quantity of output changes Fixed during a particular time period In the long-run, all costs are variable 6
Background image of page 6
Adjustments for NWC Changes in NWC are used to adjust for the discrepancy between accounting sales and costs and the actual cash receipts and payments GAAP requires that sales be recorded on the income statement when made, not when cash is received GAAP also requires that we record cost of goods sold when the corresponding sales are made, whether we have actually paid our suppliers yet 7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/02/2010 for the course BUAD FINANCE at USC.

Page1 / 31

lecture14 - Making Capital Investment Decisions 1 Agenda...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online