{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch 12 solutions

Ch 12 solutions - Ch 12 solutions Chapter 12 Cash Flow...

This preview shows pages 1–4. Sign up to view the full content.

Ch 12 solutions Chapter 12 Cash Flow Estimation and Risk Analysis Learning Objectives After reading this chapter, students should be able to: Identify “relevant” cash flows that should and should not be included in a capital budgeting analysis. Estimate a project’s relevant cash flows and put them into a time line format that can be used to  calculate a project’s NPV, IRR, and other capital budgeting metrics. Explain how risk is measured and use this measure to adjust the firm’s WACC to account for differential  project riskiness. Correctly calculate the NPV of mutually exclusive projects that have unequal lives. Chapter 12: Cash Flow Estimation and Risk Analysis Learning Objectives 43

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

View Full Document
Lecture Suggestions This chapter covers some important but relatively technical topics. Note too that this chapter is more modular than most, i.e., the major sections are discrete, hence they can be omitted without loss of continuity. Therefore, if you are experiencing a time crunch, you could skip sections of the chapter. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 12, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods) Chapter 12: Cash Flow Estimation and Risk Analysis Learning Objectives 44
Answers to End-of-Chapter Questions 12-1 Only cash can be spent or reinvested, and since accounting income does not represent cash, it is  of less fundamental importance than cash flow for investment analysis.  Recall that in the stock  valuation chapter we focused on dividends, which represent cash flows, rather than on earnings  per share. 12-2 Capital budgeting analysis should only include those cash flows that will be affected by the decision. Sunk costs are unrecoverable and cannot be changed, so they have no bearing on the capital budgeting decision. Opportunity costs represent the cash flows the firm gives up by investing in this project rather than its next best alternative, and externalities are the cash flows (both positive and negative) to other projects that result from the firm taking on this project. These cash flows occur only because the firm took on the capital budgeting project; therefore, they must be included in the analysis. 12-3 When a firm takes on a new capital budgeting project, it typically must increase its investment in receivables and inventories, over and above the increase in payables and accruals, thus increasing its net working capital (NWC). Since this increase must be financed, it is included as an outflow in Year 0 of the analysis. At the end of the project’s life, inventories are depleted and receivables are collected. Thus, there is a decrease in NWC, which is treated as an inflow in the final year of the project’s

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 14

Ch 12 solutions - Ch 12 solutions Chapter 12 Cash Flow...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online