3. New Capital Budgeting Cash Flows

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Unformatted text preview: 1 Click to edit Master subtitle style Corporate Financial Management School of Business Administration University of Miami Capital Budgeting Cash Flows Replaces slides 36 to end for Advanced Capital 22 Assigned Readings & Problems  Reading: EFS Chapter 10  Homework Problems: › EFS Chapter 10  Questions/Challenging Questions: 1, 2, 3, 4, 5, 6, 7, 8, 13  Problems: A1-A5, A8-A10, B1-B3, B5-B9, B15-B20 , B21, B23, B24, C1-C3 Replaces slides 36 to end for Advanced Capital 33 Objectives  In this lecture, you will learn to correctly specify the cash flows to discount in a WACC capital budgeting analysis. Specifically, you will: › Identify the Cash Flows to Discount › Calculate depreciation for tax purposes › Calculate tax effects when a project terminates and the assets are salvaged › Apply this knowledge in several capital budgeting analyses › Learn how to avoid several of the common pitfalls in determining the correct cash flows for a capital budgeting analysis Replaces slides 36 to end for Advanced Capital 44 Identifying the Cash Flows to  Let’s consider the structure of a “standard” project’s CFATs (cash flow after tax): 1 2 T- 1 T § Initial Capital Outlay § Installation Expenses § Transportation Expenses § Working Capital CFAT0 CFAT 1 CFAT 2 CFATT- 1 CFAT T § Revenues § Costs § Taxes on Profits § Depreciation Tax Shields § Increases in Working Capital Sometimes: § Expansion Investments § Maintenance Costs § Revenues § Costs § Taxes on Profits § Depreciation Tax Shields § Salvage Value § Dismantling Costs § Capital Gains Tax § Return of Working Capital O bj1 0 Replaces slides 36 to end for Advanced Capital 55 Notation  I=investment outlay (capital expenditure)  WC=working capital  R=revenue  C=costs (actual costs such as costs for input materials and maintenance—not depreciation or amortization expenses)  D=depreciation (and amortization)  t=time (in periods, typically years)  T=corporate tax rate  Bt=book value or tax basis at time t (when clear the subscript is often left out) 5 Replaces slides 36 to end for Advanced Capital 66  St=salvage price at time t (when clear the subscript is often left out)  ∆ before any value means “change in” 6 Replaces slides 36 to end for Advanced Capital 77  The cash flows to discount at WACC to value a project are:  “Typically” › – I – ∆ WC is paid at the start of a project 7 ) ( ) 1 )( ( B S T S TD T C R WC I CFATs-- + +-- + ∆-- = Replaces slides 36 to end for Advanced Capital 88  For past/future reference, we can also write:...
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