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Chapter 12

# Chapter 12 - Cash Flow Estimation and Risk Analysis Chapter...

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Unformatted text preview: Cash Flow Estimation and Risk Analysis Chapter 12 Relevant Cash Flows Incorporating Inflation Types of Risk Risk Analysis 12-1 Proposed Project Total depreciable cost Equipment: \$200,000 Shipping and installation: \$40,000 Changes in working capital Inventories will rise by \$25,000 Accounts payable will rise by \$5,000 Effect on operations New sales: 100,000 units/year @ \$2/unit Variable cost: 60% of sales 12-2 Proposed Project Life of the project Economic life: 4 years Depreciable life: MACRS 3-year class Salvage value: \$25,000 Tax rate: 40% WACC: 10% 12-3 Determining Project Value Estimate relevant cash flows Calculating annual operating cash flows. Identifying changes in working capital. Calculating terminal cash flows: after-tax salvage value and return of NWC. 12-4 1 2 3 4 Initial Year Net Cash Flow Find ∆ NWC. in inventories of \$25,000 Funded partly by an in A/P of \$5,000 ∆ NWC = \$25,000 – \$5,000 = \$20,000 Combine ∆ NWC with initial costs. Equipment -\$200,000 12-5 Determining Annual Depreciation Expense Year Rate x Basis Deprec. 1 0.33 x \$240 \$ 79 2 0.45 x 240 108 12-6 Annual Operating Cash Flows 1 2 3 4 Revenues 200.0 200.0 200.0 200.0 – Op. costs-120.0-120.0-120.0-120.0 – Deprec. expense -79.2-108.0 -36.0 -16.8 Operating income (BT) 0.8-28.0 44.0 63.2 – Tax (40%) 0.3 -11.2 17.6 25.3 Operating income (AT) 0.5-16.8 26.4 37.9 + Deprec. expense 79.2 108.0 36.0 16.8 Operating CF 79.7 91.2 62.4 54.7 (Thousands of dollars) 12-7 Terminal Cash Flow Q. How is NWC recovered? Q. Is there always a tax on SV? Q. Is the tax on SV ever a positive cash flow? 12-8 Recovery of NWC \$20,000 Salvage value 25,000 Tax of SV (40%) -10,000 Terminal CF \$35,000 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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Chapter 12 - Cash Flow Estimation and Risk Analysis Chapter...

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