6thCh12P - CHAPTER12 CashFlowEstimationandRisk Analysis...

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1 CHAPTER 12 Cash Flow Estimation and Risk  Analysis Relevant cash flows Incorporating inflation Types of risk Risk Analysis
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2 Capital Budgeting Definition Examples of capital budgeting decisions Capital asset decisions Require substantial commitments of time  and money Are not easily reversed
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3 Calculating the (Net) Present  Value of a Project To calculate NPV of a project you must  estimate The future cash flows and  a discount rate
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4 Estimating Cash Flows Free cash flow  NOPAT – Net new investment in operating  capital ( Revenues -  OpCosts- Depreciation)(1-T)  Depreciation -  Net Fixed Assets -  Operating Working Capital ( Rev- OpCosts)(1-T) + T Dep - Net Fixed  Assets- Operating Working Capital
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5 What Cash Flows Do We  Discount? After tax cash flows Incremental cash flows Include opportunity costs Do not include sunk costs Do not include allocated overhead
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6 Should financing effects be  included in cash flows? No, dividends and interest expense should  not be included in the analysis.  Financing effects have already been taken  into account by discounting cash flows at the  WACC of 10%. Deducting interest expense and dividends  would be “double counting” financing costs.
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If the new product line were to decrease  the sales of the firm’s other lines, would  this affect the analysis? Yes.  The effect on other projects’ CFs is an  “externality.” Net CF loss per year on other lines would be  a cost to this project. Externalities can be positive (in the case of 
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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6thCh12P - CHAPTER12 CashFlowEstimationandRisk Analysis...

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