Chapter8a notes

Chapter8a notes - Chapter 8 Fundamentals of Capital...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 8 Fundamentals of Capital Budgeting
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Spring 2010 2 Focusing Question China Unicom spends 18.7 billion yuan on its wireless network in 2008 and plans to increase its capital expenditure to 100 billion yuan for 2009 and 2010. How does China Unicom determine its capital budget, and why its stock price fell at the announcement?
Background image of page 2
Spring 2010 3 Course Plan Financial Management Foundation and Tools Valuation Short-term Financial Management Risk and Return Long-term Financing Decisions Financial Statement Analysis Capital Budgeting Working Capital Management Cost of Capital Capital Structure Valuation Principle Time Value of Money Bonds and Stocks Investment Decision Rules
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Spring 2010 4 Outline Capital Budgeting Tax Shield Approach Incremental Earnings Approach Forecasting Incremental Earnings Analyzing the Project Common Pitfalls Converting Earnings to Cash Flows Replacement Decisions Other Adjustments
Background image of page 4
Spring 2010 5 Learning Objectives 1. Given a set of facts, identify relevant cash flows for a capital budgeting problem. 2. Prepare a pro forma income statement for a given project and compute the forecasted incremental earnings (unlevered net income). 3. Show the accounting treatment for capital expenditures versus operating expenses. 4. Illustrate the impact of depreciation expense on incremental cash flows. 5. Demonstrate how to incorporate changes in net working capital in estimating incremental cash flows. 6. Convert forecasted incremental earnings (unlevered net income) to incremental cash flows for a given project.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Spring 2010 6 Capital Budgeting ± Capital Budget: a list of the investments that a company plans to undertake ± Capital Budgeting : the process of analyzing alternate investments and deciding which ones to accept ± Steps in Capital Budgeting 1. Estimate the project’s expected future cash flows 2. Estimate the required return for projects of this risk level 3. Apply capital budgeting decision rules and compute NPV or IRR 4. Compute the sensitivity of the NPV to the uncertainty of the forecast
Background image of page 6
Spring 2010 7 Cash Flows in a Typical Project
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Spring 2010 8 Estimating Free Cash Flow ± Free Cash Flow ² The incremental effect of a project on a firm’s available cash ± Start by estimating the incremental earnings of a project ² How the investment decision will affect the firm’s reported profits from an accounting perspective. ² Information from pro forma income statement ± Key issues in estimating the project’s free cash flow: ² When is a cash flow incremental? ² Earnings are not actual cash flows. How to calculate free cash flow from accounting earnings? ² What are the common pitfalls?
Background image of page 8
Spring 2010 9 Earnings Reported on Income Statement
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Spring 2010 10 Calculating Free Cash Flows Year Revenues Cost of Goods Sold Gross Profit Selling, General and Admin Depreciation EBIT Income Tax at 40% Incremental Earnings + : Add Back Depreciation - : Minus Cost of Equipment - : Minus Changes in NWC Incremental Free Cash Flows ± Incremental Earnings (unlevered net income) = EBIT (1 – t c ) = (Revenues – Costs –
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 35

Chapter8a notes - Chapter 8 Fundamentals of Capital...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online