CHAPTER 12 - CapitalBudgetingCashFlow Estimation

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Capital Budgeting Cash Flow  Estimation  Incremental, After-tax Cash Flows Cash Flows vs. Accounting Profit After-tax, effect on shareholder wealth Incremental – how cash flows of firm change  if project accepted
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Problematic Cash Flows Are never included in incremental cash flows Sunk costs Financing costs Are always included in incremental cash  flows Opportunity costs Externalities (cannibalization)
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Other Cash Flow issues Changes in Net Working Capital Show as outflow at beginning of project  and inflow at end. Why is this included?  Is not “money  spent” is just an increased investment  during project’s life.  It is “recovered” when  the asset is not longer in use.  
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Depreciation It is not a cash flow, so why include.  Don’t really  include the depreciation, but have to consider it  because it affects taxes, which are a cash flow. Example:  Sales 100 100 Cash Expenses   50   50 Depreciation     0      10 EBIT    50   40 Taxes (40%)    20   16 Net Income    30   24 Cash Flow    30                 34 (100-50-16)
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Depreciation MACRS – Modified Accelerated Cost  Recovery System
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This note was uploaded on 04/24/2011 for the course MKT 291 taught by Professor Brandabur during the Spring '08 term at Miami University.

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CHAPTER 12 - CapitalBudgetingCashFlow Estimation

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