10-Cash-flow-estimation-FIN6406

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

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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
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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
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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%.
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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.
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Cash Flow Estimation  Cash Flow Estimation 55 = Corporate cash flow with project minus Corporate cash flow without project Incremental Cash Flow
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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?
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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?
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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?
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Cash Flow Estimation  Cash Flow Estimation 99 n Yes! The effects on the other projects’ CFs is an externality . n
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This note was uploaded on 09/23/2011 for the course FIN 6406 taught by Professor Sturm,r during the Spring '08 term at University of Central Florida.

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

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