Chapter10_s - 4/14/10 Chapter 10 making Capital investment...

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4/14/10 Chapter 10 making Capital investment Decisions Objectives Understand how to determine the relevant cash flows for various types of proposed investments Understand the various methods for computing operating cash flow Understand how to set a bid price for a project Understand how to evaluate the equivalent annual cost of a project
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4/14/10 22 Project’s incremental cash flow Should you subtract interest expense or dividends when calculating CF? Suppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis? Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?
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4/14/10 Pro Forma Statements and Cash Flow Capital budgeting relies heavily on pro forma accounting statements, particularly income statements Computing cash flows – refresher Operating Cash Flow (OCF) = EBIT + depreciation (non- cash item) – taxes OCF = Net income + depreciation (when there is no interest expense)
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4/14/10 Example The company expects to sell 50,000 cans of shark attractant per year at a price of $4 per can. It costs us about $2.50 per can to make the attractant, the project has a three-year life. We require a 20% return on new products. Fixed cost for the project is $90,000 in manufacturing equipment with 3 year life. We use straight line method to depreciate the
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Pro Forma Income Statement Sales
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This note was uploaded on 04/13/2010 for the course FINANCE 414 taught by Professor Finance during the Spring '10 term at Abraham Baldwin Agricultural College.

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Chapter10_s - 4/14/10 Chapter 10 making Capital investment...

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