MGMT_130_Lecture_9

MGMT_130_Lecture_9 - MGMT 130 Lecture 9 Capital Investment...

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

View Full Document Right Arrow Icon
MGMT 130 Lecture 9 Capital Investment Decisions
Background image of page 1

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

View Full DocumentRight Arrow Icon
Relevant Cash Flows 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 These cash flows are called incremental cash flows The stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows
Background image of page 2
Asking the Right Question Asking the Right Question You should always ask yourself “Will this cash flow occur ONLY if we accept the project?” If the answer is “yes”, it should be included in the analysis because it is incremental Ask this question for both positive and negative cash flows
Background image of page 3

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

View Full DocumentRight Arrow Icon
Common Types of Cash Flows Common Types of Cash Flows Sunk costs – costs that have accrued in the past. These costs are not changed by the decision to go forward or not with the project. Therefore they are not incremental and do not enter into the capital budgeting decision. Opportunity costs – costs of lost options. This could be revenues that are foregone due to the new project. For example, using a warehouse for a project vs. selling for cash. Side effects Positive side effects (synergy) – benefits to other projects. Negative side effects (erosions) – costs to other projects. For example, cannibalizing existing sales. Allocated Costs – some costs benefit a number of projects. Remember, a cash flow is only counted here if it would not occur if the project is not accepted.
Background image of page 4
Types of Cash Flows Changes in net working capital Financing costs Taxes For these, will they occur ONLY if we take on the project? If the answer is “no”, it should not be included in the analysis because it will occur anyway If the answer is “part of it”, then we should include the part that occurs because of the project
Background image of page 5

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

View Full DocumentRight Arrow Icon
Pro Forma Statements and Cash Flow 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 – taxes OCF = Net income + depreciation when there is no interest expense Cash Flow From Assets (CFFA) = OCF – net capital spending (NCS) – changes in NWC
Background image of page 6
Pro Forma Income Statement Pro Forma Income Statement Sales (50,000 units at $4.00/unit) $200,000 COGS ($2.50/unit) 125,000 Gross profit $ 75,000 Fixed costs 12,000 Depreciation ($90,000 / 3) 30,000 EBIT $ 33,000 Taxes (34%) 11,220 Net Income $ 21,780
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 04/25/2010 for the course MGMT 130A taught by Professor Stuff during the Winter '10 term at UCLA.

Page1 / 29

MGMT_130_Lecture_9 - MGMT 130 Lecture 9 Capital Investment...

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