Chapter 12 - CHAPTER12 CashFlowEstimationandRisk Analysis...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
    12-1 CHAPTER 12 Cash Flow Estimation and Risk  Analysis Relevant cash flows Incorporating inflation Types of risk Risk Analysis
Background image of page 1

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

View Full DocumentRight Arrow Icon
    12-2 Proposed Project Total depreciable cost Equipment: $200,000 Shipping: $10,000 Installation: $30,000 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 Variable cost: 60% of sales
Background image of page 2
    12-3 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%
Background image of page 3

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

View Full DocumentRight Arrow Icon
    12-4 Determining project value Estimate relevant cash flows Calculating annual operating cash flows. Identifying changes in working capital. Calculating terminal cash flows. 0 1 2 3 4 Initial OCF 1 OCF 2 OCF 3 OCF 4 Costs + Terminal CFs NCF 0 NCF 1 NCF 2 NCF 3 NCF 4
Background image of page 4
    12-5 Initial year net cash flow Find Δ NOWC.  in inventories of $25,000 Funded partly by an  in A/P of $5,000 Δ NOWC = $25,000 - $5,000 = $20,000 Combine Δ NOWC with initial costs. Equipment         -$200,000    Installation       -40,000    Δ  NOWC       -20,000 Net CF 0 -$260,000
Background image of page 5

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

View Full DocumentRight Arrow Icon
    12-6 Determining annual  depreciation expense Year Rate   x  Basis Depr   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.
Background image of page 6
    12-7 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 - Depr’n 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 + Depr’n Expense 79.2 108.0 36.0 16.8 Operating CF 79.7 91.2 62.4 54.7 (Thousands of dollars)
Background image of page 7

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

View Full DocumentRight Arrow Icon
    12-8 Terminal net cash flow Recovery of NOWC $20,000 Salvage value    25,000 Tax on SV (40%)   -10,000 Terminal CF $35,000 Q. How is NOWC recovered? Q. Is there always a tax on SV? Q. Is the tax on SV ever a positive cash flow?
Background image of page 8
  12-9 Should financing effects be  included in cash flows? 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%. Deducting interest expense and 
Background image of page 9

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

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 34

Chapter 12 - CHAPTER12 CashFlowEstimationandRisk Analysis...

This preview shows document pages 1 - 10. Sign up to view the full document.

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