L_12 - Lecture 12 Capital Budgeting Lecture Organization...

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Lecture 12 Capital Budgeting Lecture Organization Incremental Cash Flows Pro Forma Financial Statements and Project Cash Flows and Net Working Capital
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Fundamental Principles of Project Evaluation: Project evaluation - the application of one or more capital budgeting decision rules to estimated relevant project cash flows in order to make the investment decision. Relevant cash flows - the incremental cash flows associated with the decision to invest in a project.
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Incremental Cash Flows How identify Incremental Cash Flows? Key issues: What kind of costs should be accounted for ? A. Sunk costs B. Opportunity costs C. Side effects D. Net working capital E. Financing costs F. Other issues
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Project Evaluation Project Value = Sum of Discounted Cash Flows ( CF) that the project generates throughout its life.
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Example: Using Pro Formas for Project Evaluation Project Cash Flow per period = (CF) = + Operating cash flow - Changes in net working capital - Capital spending
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Example: Using Pro Formas for Project Evaluation (continued) Project Cash Flows Time Line 0 1 2 3 _ Operating CF OCF 0 OCF 1 OCF 2 OCF 3 - Chg. NWC - NWC 0 - NWC 1 NWC 2 - NWC 3 - Cap.Spending -Cap. Sp 0 -Cap. Sp 1 -Cap. Sp 2 -Cap.
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This note was uploaded on 06/22/2011 for the course FINA 365 taught by Professor Koch during the Spring '08 term at South Carolina.

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L_12 - Lecture 12 Capital Budgeting Lecture Organization...

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