Chapter12-13CapitalBudgetingOther

Chapter12-13CapitalBudgetingOther - OEM 2009 Program...

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OEM 2009 Program Other Topics in Capital Budgeting Page 1 CHAPTERS 12 & 13 Other Topics in Capital Budgeting Factors to Consider ± Cash flow vs. accounting income ± After-tax basis for cash flows ± Financing charges not included ± Treat inflation consistently Other Factors to Consider ± Incremental cash flows z Sunk costs z Opportunity costs z Externalities (cannibalization) z Shipping and installation z Changes in working capital Incremental Cash Flow ± Components of a project’s incremental cash flow include: z Costs: Initial investment outlays z Benefits: Operating cash flows (net) z Terminal cash flows Cash Flow Estimation Income Cash Flow Revenue $100.00 $100.00 Depreciation -$20.00 --- Other Costs -$40.00 -$40.00 EBT $40.00 Taxes (40%) -$16.00 -$16.00 NOPAT $24.00 $44.00 Cash Flow Estimation OCF = NOPAT + Depreciation OCF = $24.00 + $20.00 = $44.00 OCF = (R - C)(1-T) + TD OCF = ($100 - $40)(1-.40) + ($20)(.40) OCF = $44.00
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OEM 2009 Program Other Topics in Capital Budgeting Page 2 Depreciation History ± Pre 1954: Straight line only ± 1954: Accelerated options z Double declining balance Double-declining balance z Sum-of-the-years’ digits ± 1981: Introduction of ACRS ± 1986: Change to MACRS MACRS Depreciation ± Class life or recovery class ± Half-year convention ± Depreciable basis ± Section 179 expense ± Straight line option Section 179 Expense Year Deduction Phaseout 2008 $250,000 $800,000 2007 $125,000 $500,000 2006 $108 000 $430 000 Section 179 Expense $108,000 $430,000 2005 $105,000 $420,000 2004 $102,000 $410,000 2003 $100,000 $400,000 2002 $24,000 $200,000 2001 $24,000 $200,000 2000 $20,000 $200,000 MACRS Classes ± 3-year ± 5-year ± 7 yea 7-year ± 10-year ± 27.5-year (straight line only) ± 39-year (straight line only) Cost Section 179 Depreciable basis 110,000 - 10,000 100,000 MACRS Depreciation Class: 5-year MACRS life Depreciable life: 6 years Year Percent Depreciation 1 2 20 32 20,000 32,000 MACRS Depreciation 3 4 5 6 19 12 11 6 19,000 12,000 11,000 6,000 100,000
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OEM 2009 Program Other Topics in Capital Budgeting Page 3 Base percent (100/5)*(2) 40.0% Year 1 40/2 20% Percentages for MACRS Year 2 Year 3 Year 4 (100-20)(.40) (80-32)(.40) (48-19)(.40) 32% 19% 12% Remaining depreciable life Remaining value 1.5 17,000 (17)( 40 7 Percentages for MACRS Year 5 Year 6 (17/1.5) (17 - 11) 11% 6% (17)(.40) (17/1.5) 11 (straight line) Questions ± What happens if a company decides to depreciate its fixed assets over 7 years instead of 10 years? ² Physical assets would not be affected. ² Net fixed assets on balance sheet would decline more rapidly. Questions ² Net income and earnings per share would decrease. ² Tax payments would decrease. ² The firm’s cash position would improve. Cash Flow Example Assumptions : MACRS Class = 3 Years Life = 4 Years Life Price = $100,000 Freight & Installation = $20,000 Salvage Value = $30,000 Cash Flow Example Assumptions : Δ NWC = $10,000 increase in inventory in Year 0 Δ Costs = $50,000 decrease in costs in Years 1-4 Tax Rate = 40% MCC = 10%
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OEM 2009 Program Other Topics in Capital Budgeting Page 4 Cash Flow Example Initial Outlay (Year 0) : Price = $100,000 F& = $ 20 000 Depreciable Basis F&I $ 20,000 Δ NWC = $ 10,000 Total = $130,000 Cash Flow Example Depreciation Schedule : MACRS Yearly Depreciation Yea Rate Depreciation Tax Shelte Year Tax Shelter 1 0.33 $39,600 $15,840 2 0.45 $54,000 $21,600 3 0.15 $18,000 $7,200 4 0.07 $8,400 $3,360 $120,000 $48,000 Total Cash Flow Example Year 0 Year 1 Year 2 Year 3 Year 4 Initial Outlay -$130,000 Cost Reduction $50,000 $50,000 $50,000 $50,000 Tax Effect of Reduction -$20,000 -$20,000 -$20,000 -$20,000 Depreciation Tax Shelter $15,840 $21,600 $7,200 $3,360 Salvage Value $30 000 $30,000
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This note was uploaded on 05/12/2010 for the course FIN 5405 taught by Professor Tapley during the Summer '08 term at University of Florida.

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Chapter12-13CapitalBudgetingOther - OEM 2009 Program...

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