4. New Advanced Capital Budgeting

4. New Advanced Capital Budgeting - 1 Click to edit Master...

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Unformatted text preview: 1 Click to edit Master subtitle style School of Business Administration University of Miami Advanced Capital Budgeting Corporate Financial Management Replaces slides 36 to end for Advanced Capital Assigned Readings & Problems  Read Chapter 10 & 11  In Chapter 10 do: If you havent already, do problems in Chapter 10: B3, B4, B6d, B9, B11, B12, B20, C1, C2, C4  In Chapter 11 do: Questions/Challenging Questions: 2, 3, 4, 6, 13, 18 Problems: A1, A3, A5-A8, A12, B1-B5, B7, B8, B11, C1, C2, C4 (optional) 22 2 SEE END OF THE LECTURE NOTES FOR ADDITIONAL ASSIGNED PROBLEMS Replaces slides 36 to end for Advanced Capital Learning Objectives  In these lecture notes you will learn to apply capital budgeting techniques to solving problems that ask you to: Decide when to replace an old piece of equipment with a new one Choose between two machines with different useful lives Determine the optimal replacement cycle for replacing an asset such as a fleet of delivery trucks Take inflation into account in capital budgeting problems Calculate the optimal harvest time for living assets Optimally invest with capital rationing 33 3 Replaces slides 36 to end for Advanced Capital 4 Notation  I=investment outlay (capital expenditure)  WC=working capital  R=revenue  C=costs (actual costs such as costs for input materials and maintenancenot 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) 4 Replaces slides 36 to end for Advanced Capital 5  St=salvage price at time t (when clear the subscript is often left out)  before any value means change in 5 Replaces slides 36 to end for Advanced Capital 6  The cash flows to discount at WACC to value a project are: CFATs= I WC + ( R C)(1 T) + TD + S-T(S-B)  Typically I WC is paid at the start of a project ( R C)(1 T) + TD is received each year the project is operated WC + S-T(S-B) is recovered at the end of the final year of the project 6 Replaces slides 36 to end for Advanced Capital 7  For past/future reference, we can also write: CFATs = I WC + ( R C)(1 T) + TD + S-T(S-B) = I WC + EBIT(1 T) + D + S-T(S-B) where EBIT = Revenue Cost Depreciation Replaces slides 36 to end for Advanced Capital  and for an incremental project choice/replacement analysis: 88 Replaces slides 36 to end for Advanced Capital...
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4. New Advanced Capital Budgeting - 1 Click to edit Master...

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