Lecture 30 - 156 Business Finance(ACC501 Lesson 30 Review...

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Unformatted text preview: 156 Business Finance (ACC501) Lesson 30 Review of the Previous Lecture • Making Capital Investment Decisions – Project Cash Flows – Incremental Cash Flows • Sunk Costs • Opportunity Costs • Side Effects • Net Working Capital • Financing Costs • Other Issues – Pro Forma Financial Statements Topics under Discussion • Pro Forma Financial Statements (Cont.) • A Closer Look on Net Working Capital • Depreciation • Tax Shield Approach Pro Forma Financial Statements • Suppose we want to prepare a set of pro forma financial statements for a project for ND Enterprises. In order to do so, we must have some background information. In this case, assume: 1. Sales of 10,000 units/year @ $5/unit. 2. Variable cost/unit is $3. Fixed costs are $5,000/year. Project has no salvage value. Project life is 3 years. 3. Project cost is $21,000. Depreciation is $7,000/year. 4. Investment in net working capital is $10,000. 5.The firm’s required return is 20%. The tax rate is 34%. Pro Forma Financial Statements Projected Income Statements Sales (10,000 units/year @ $5/unit) $50,000 157 Var. costs ($3/unit) 30,000 Gross Profit $20,000 Fixed costs 5,000 Depreciation 7,000 EBIT $8,000 Taxes (34%) 2,720 Net income $5,280 Projected Balance Sheets 0 1 2 3 Net Working Capital $10,000 $10,000 $10,000 $10,000 Net Fixed Assets 21,000 14,000 7,000 Total $31,000 $24,000 $17,000 $10,000 Project Cash Flows • Let’s use the information from the previous example to do a capital budgeting analysis....
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Lecture 30 - 156 Business Finance(ACC501 Lesson 30 Review...

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