{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

10-Cash-flow-estimation-FIN6406

10-Cash-flow-estimation-FIN6406 - Project Cash Flow...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
Cash Flow Estimation  Cash Flow Estimation 11 n Relevant cash flows n Working capital treatment n Unequal project lives n Abandonment value n Inflation Project Cash Flow Estimation
Background image of page 1

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

View Full Document Right Arrow Icon
Cash Flow Estimation  Cash Flow Estimation 22 n Cost: $200,000 + $10,000 shipping + $30,000 installation. n Depreciable cost $240,000. n Inventories will rise by $25,000 and payables will rise by $5,000. n Economic life = 4 years. n Salvage value = $25,000. n MACRS 3-year class. Proposed Project
Background image of page 2
Cash Flow Estimation  Cash Flow Estimation 33 n Incremental gross sales = $250,000. n Incremental cash operating costs = $125,000. n Tax rate = 40%. n Overall cost of capital = 10%.
Background image of page 3

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

View Full Document Right Arrow Icon
Cash Flow Estimation  Cash Flow Estimation 44 0 1 2 3 4 Initial Outlay OCF 1 OCF 2 OCF 3 OCF 4 + Terminal CF NCF 0 NCF 1 NCF 2 NCF 3 NCF 4 Set up a time line for the project operating CFs.
Background image of page 4
Cash Flow Estimation  Cash Flow Estimation 55 = Corporate cash flow with project minus Corporate cash flow without project Incremental Cash Flow
Background image of page 5

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

View Full Document Right Arrow Icon
Cash Flow Estimation  Cash Flow Estimation 66 n NO! The costs of capital are already incorporated in the analysis since we use them in discounting. n If we included them as cash flows, we would be double counting capital costs. Should CFs include interest expense? Dividends?
Background image of page 6
Cash Flow Estimation  Cash Flow Estimation 77 n NO! This is a sunk cost . Focus on incremental investment and operating cash flows. Suppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis?
Background image of page 7

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

View Full Document Right Arrow Icon
Cash Flow Estimation  Cash Flow Estimation 88 n Yes! Accepting the project means we will not receive the $25,000. This is an opportunity cost and it should be charged to the project. n A.T. opportunity cost = $25,000 (1 - T) = $15,000 annual cost. Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?
Background image of page 8
Cash Flow Estimation  Cash Flow Estimation 99 n Yes! The effects on the other projects’ CFs is an externality .
Background image of page 9

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

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}