Chapters 12-13 Powerpoint

Chapters 12-13 Powerpoint - CHAPTERS 12 & 13 Cash Flow...

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CHAPTERS 12 & 13 Cash Flow Estimation and Risk Analysis Real Options and Other Topics in Capital Budgeting
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C a p i t a l B u d g e t i n g F I N 3 4 0 3 - B u s i n e s s F i n a n c e B a s i c s O t h e r T o p i c s P r o j e c t s w i t h U n e q u a l L i v e s M A C R S D e p r e c i a t i o n I n f l a t i o n C a s h F l o w E s t i m a t i o n R i s k A n a l y s i s R e a l O p t i o n s C a p i t a l R a t i o n i n g D e c i s i o n T r e e s E x a m p l e
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Factors to Consider Cash flow vs. accounting income After-tax basis for cash flows Financing charges not included Treat inflation consistently
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Other Factors to Consider Incremental cash flows Sunk costs Opportunity costs Externalities (cannibalization) Shipping and installation Changes in working capital
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Incremental Cash Flow Components of a project’s incremental cash flow include: Costs: Initial investment outlays Benefits: Operating cash flows (net) Terminal cash flows
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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
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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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Depreciation History Pre 1954: Straight line only 1954: Accelerated options Double-declining balance Sum-of-the-years’ digits 1981: Introduction of ACRS 1986: Change to MACRS
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MACRS Depreciation Class life or recovery class Half-year convention Depreciable basis Section 179 expense Straight line option
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MACRS Depreciation Year Deduction Phaseout 2010 $250,000 $800,000 2009 $250,000 $800,000 2008 $250,000 $800,000 2007 $125,000 $500,000 2006 $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 Section 179 Expense
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MACRS Classes 3-year 5-year 7-year 10-year 27.5-year (straight line only) 39-year (straight line only)
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Cost Section 179 Depreciable basis 110,000 - 10,000 100,000 Class: 5-year MACRS life Depreciable life: 6 years MACRS Depreciation
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Year Percent Depreciation 1 2 3 4 5 6 20 32 19 12 11 6 20,000 32,000 19,000 12,000 11,000 6,000 100,000 MACRS Depreciation
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Base percent (100/5)*(2) 40.0% Year 1 Year 2 Year 3 Year 4 40/2 (100-20)(.40) (80-32)(.40) (48-19)(.40) 20% 32% 19% 12% Percentages for MACRS
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Year 5 Year 6 (17/1.5) (17 - 11) 11% 6% Remaining depreciable life Remaining value 1.5 17,000 (17)(.40) (17/1.5) 7 11 (straight line) Percentages for MACRS
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Questions What happens if a company decides to depreciate its fixed assets over 7 years instead of 10 years? Physical assets would not be affected. Net fixed assets on balance sheet
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Questions Net income and earnings per share would decrease. Tax payments would decrease. The firm’s cash position would improve.
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Cash Flow Example Assumptions : MACRS Class = 3 Years Life = 4 Years Price = $100,000 Freight & Installation = $20,000 Salvage Value = $30,000
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Cash Flow Example Assumptions : NWC = $10,000 increase in inventory in Year 0 Costs = $50,000 decrease in costs in Years 1-4 Tax Rate = 40% MCC = 10%
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Cash Flow Example Initial Outlay (Year 0) : Price = $100,000 F&I = $ 20,000 NWC = $ 10,000 Total = $130,000 Depreciable Basis
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Cash Flow Example Depreciation Schedule : MACRS Yearly Depreciation Year Rate Depreciation 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
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Chapters 12-13 Powerpoint - CHAPTERS 12 & 13 Cash Flow...

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