06%20relevant%20cash%20flows%20and%20NPV%20analysis

06%20relevant%20cash%20flows%20and%20NPV%20analysis - ows...

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Unformatted text preview: ows and NPV analysis - 1 FNAN 301 Financial Management Relevant cash flows and NPV analysis ows and NPV analysis - 2 Topics Covered Relevant cash flows Project cash flow Operating cash flow Cash flow effects from changes in net working capital Cash flow from capital spending Cash flow from selling project Terminal value Opportunity costs Examples Shark Jumpers Patriot Theaters Sources of value Evaluating NPV estimates What-if analysis Sensitivity, scenario, simulation analysis, and break-even analyses ows and NPV analysis - 3 Relevant Cash Flows: Overview There are a variety of capital budgeting approaches, but NPV is the most preferred NPV= C + [C 1 /(1+r) 1 ] + + [C t /(1+r) t ] NPV is only concerned with value NPV analysis can be used for projects with any pattern of cash flows The question of whether a project should be accepted or rejected can be answered by finding the projects NPV and accepting if NPV > 0 and rejecting if NPV < 0 ows and NPV analysis - 4 Relevant Cash Flows: Overview To compute the NPV of a project, it is critical to Determine the appropriate cost of capital (r) Based on the expected return of securities with the same level of risk as the project Forecast relevant expected cash flows (C , C 1 , , C t ) Expected cash flows are final estimates and forecasts based on expected values of important inputs like revenue, costs, taxes, etc. Expected values are often the weighted average of different possible outcomes, where weights are the probability of each outcome Incorporate everything that could happen and come up with a best guess as to what will happen ows and NPV analysis - 5 Relevant Cash Flows: Overview The relevant expected cash flows that should be included in a projects NPV are those that are only expected to occur if the project is accepted Called incremental cash flows Incremental expected cash flow for project = expected cash flow for firm with project expected cash flow for firm without project The stand-alone principle allows us to analyze a project simply by evaluating incremental effects The goal of analysis is to evaluate incremental cash flows, so we look at incremental revenues, costs, taxes, capital spending, etc. ows and NPV analysis - 6 Relevant Cash Flows: Overview There are six components to take into account when determining the relevant cash flows for each year for a given project ows and NPV analysis - 7 Relevant Cash Flows: Overview Six components of relevant cash flows for a project Direct components of a projects relevant cash flows for each year 1) Operating activities Sales, costs, etc. associated with the projects business activities 2) Changes in net working capital Effect on cash flows from situations where measures of operating activities do not reflect cash flows such as with buying or selling on credit, building up or drawing down inventories, etc....
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06%20relevant%20cash%20flows%20and%20NPV%20analysis - ows...

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