Intellipath U4 Discounted Cash Flow.docx - Introduction Relevant cash flows must be estimated for each of the three phases of a project\u2019s life These

Intellipath U4 Discounted Cash Flow.docx - Introduction...

This preview shows page 1 - 3 out of 8 pages.

Introduction Relevant cash flows must be estimated for each of the three phases of a project’s life. These phases include: The initial cash outflow The operating cash flows over the life of the project The cash flows associated with the terminal year of the project The initial cash outflows typically take place in what is known as Year 0 and include the cash flows associated with the purchase and installation of the investment, plus any increase in working capital that is expected to result of the acceptance and implementation of the project. The operating life of the project includes Years 1 through the terminal year of the project and includes any changes in operating revenues and expenditures over the life of the project adjusted for taxes and noncash expenses. The cash flows associated with the terminal year of the project include the salvage value of the project plus the release of the previously encumbered net working capital. Capital budgeting requires using operating cash flows to evaluate capital projects rather than accrual-based net income to provide more consistent and reliable results. Operating cash flows differ from accrual-based net income primarily due to the inclusion of depreciation expense as an after-tax addition rather than just a pretax deduction. To calculate the operating cash flows, a prescribed set of steps must be followed for each period of the project’s life. Learning Materials The Brenswick-Halter Case When Marshall Patrick returned to the office the next morning, he requested that Bill Clemons, the controller, and Selma Mathews, the corporate accounting manager, meet in the conference room to review and quantify the plant modernization proposal. Bill and Selma brought with them the current budget projections for the next period, which did not include the monetary effects of the proposed project changes. The relevant portions of the 2015 budget were presented in thousands: Revenue Cost of Goods 180,000 117,000 Gross Profit 63,000 If they estimated 20 % increase in production and sales, along with 25% reduction in costs could be validated, the team determined the revised budget would show the following results: Revenue Cost of Goods 216,000 105,300
Image of page 1
Gross Profit 110,700 If the proposed modifications
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 8 pages?

  • Fall '19
  • Depreciation, Generally Accepted Accounting Principles, Marshall Patrick

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes