12 Project Cash Flow Analysis

12 Project Cash - 12 1 CHAPTER 12 Project Cash Flow Analysis Relevant cash flows Working capital treatment Unequal project lives Abandonment value

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
12 - 1 Relevant cash flows Working capital treatment Unequal project lives Abandonment value Inflation CHAPTER 12 Project Cash Flow 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 Cost: $200,000 + $10,000 shipping + $30,000 installation. Depreciable cost $240,000. Inventories will rise by $25,000 and payables will rise by $5,000. Economic life = 4 years. Salvage value = $25,000. MACRS 3-year class. Proposed Project
Background image of page 2
12 - 3 Incremental gross sales = $250,000. Incremental cash operating costs = $125,000. Tax rate = 40%. Overall cost of capital = 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 0 1 2 3 4 Initial Outlay OCF 1 OCF 2 OCF 3 OCF 4 + Terminal CF NCF 0 NCF 1 NCF 2 NCF 3 NCF 4 Set up without numbers a time line for the project CFs.
Background image of page 4
12 - 5 = Corporate cash flow with project minus Corporate cash flow without project Incremental Cash Flow
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 NO. The costs of capital are already incorporated in the analysis since we use them in discounting. If we included them as cash flows, we would be double counting capital costs. Should CFs include interest expense? Dividends?
Background image of page 6
12 - 7 NO. This is a sunk cost . Focus on incremental investment and operating cash flows. Suppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis?
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 Yes. Accepting the project means we will not receive the $25,000. This is an opportunity cost and it should be charged to the project. A.T. opportunity cost = $25,000 (1 - T) = $15,000 annual cost. Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?
Background image of page 8
12 - 9 Yes. The effects on the other projects’ CFs are “externalities” . Net CF loss per year on other lines would be a cost to this project. Externalities will be positive if new projects are complements to existing assets, negative if substitutes. If the new product line would decrease sales of the firm’s other products by $50,000 per year, would this affect the analysis?
Background image of page 9

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

View Full DocumentRight Arrow Icon
Net Investment Outlay at t = 0 (000s) Equipment Freight + Inst. Change in NWC
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/24/2010 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

Page1 / 43

12 Project Cash - 12 1 CHAPTER 12 Project Cash Flow Analysis Relevant cash flows Working capital treatment Unequal project lives Abandonment value

This preview shows document pages 1 - 11. Sign up to view the full document.

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