L_13 - Lecture Outline Lecture 13 Project Analysis and...

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Lecture Outline Lecture 13 Project Analysis and Evaluation Lecture Organization OCF Scenario analysis
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Project Evaluation: Project valuation - the application of one or more capital budgeting decision rules to estimated relevant project cash flows in order to make the investment decision. Project Cash Flow per period = (CF) = + Operating cash flow - Changes in net working capital - Capital spending
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Alternative Definitions of OCF Let: OCF = operating cash flow S = sales C = operating costs D = depreciation T = corporate tax rate
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Alternative Definitions of OCF (concluded) The Tax-Shield Approach OCF = (S - C - D) + D - (S - C - D) × T = (S - C) × (1 - T) + (D × T) = (S - C) × (1 - T) + Depreciation x T The Bottom-Up Approach OCF = (S - C - D) + D - (S - C - D) × T = (S - C - D) × (1 - T) + D = Net income + Depreciation The Top-Down Approach OCF = (S - C - D) + D - (S - C - D) × T = (S - C) - (S - C - D) × T = Sales - Costs - Taxes
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Now let’s put our new-found knowledge to work. Example: Assume we have the following background information for a project being considered by Gillis, Inc. Calculate the project’s NPV and payback period.
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L_13 - Lecture Outline Lecture 13 Project Analysis and...

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