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350-11a_note[1]

350-11a_note[1] - 350-11a_note 11S TOPIC 11 CASH FLOW...

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350-11a_note, 11S Page 1 of 7 0 1 2 3 4 Initial OCF 1 OCF 2 OCF 3 OCF 4 Costs + Terminal CFs NCF 0 NCF 1 NCF 2 NCF 3 NCF 4 TOPIC 11: CASH FLOW ESTIMATION AND RISK ANALYSIS (CHAPTER 12) I. Outline A. Estimate Project Cash Flows 1. Initial Investment Cost 2. Annual Operating CF 3. Terminal Year CF 4. Relevant CF B. Estimate Project Risk II. Homework Assignment Chapter 12 Question 1-4 Problem 1-4 III. Case Background A. Allied Food Products is considering expanding with a new juice product. You are asked to evaluate this new project. B. Your task Estimate CFs for this new project ========================================================= Class Notes I. What are the project’s CFs? A. Initial Investment Cost B. Annual operating CF C. Terminal year cash flow D. Net CF

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350-11a_note, 11S Page 2 of 7 II. Collect information of the proposed project Factors Assumptions A. Time: Life of the project o Economic life = 4 years B. Capital Expenditure (in 000’s) o Equipment = \$200 o Shipping & Installation = \$40 C. Depreciation o Depreciation rate: 33%, 45%, 15%, and 7% o Salvage Value: BV = ? o Salvage Value: MV = \$25 D. Change in Net Working Capitals (in 000’s) o Inventory will rise by \$25 o Accounts payable will rise by \$5 o Accounts receivable remains the same o Recapture of increase in NWC at the end of the project E. Business Operation o New sales: 100,000 units/year @ \$2/unit o Variable cost: 60% of sales F. Terminal Value o The project will be terminated at the end of the economic life G. Tax rate o Marginal tax rate = 40% H. Cost of Capital o WACC = 10% III. Estimate CF A. Initial Year Net Cash Flow 1. Initial investment cost Capital expenditure a) Equipment = 200 b) Installation = 40 2. Find Δ NOWC. a) in inventories of \$25 b) in A/P of \$5 c) Δ NOWC = \$25 - \$5 = \$20 3. Combine Δ NOWC with initial costs. Capital expenditure Equipment -\$200 Installation -40 Δ NOWC in inventories -25 in A/P +5 Net CF 0 -\$260
350-11a_note, 11S Page 3 of 7 B. Annual Operating Cash Flow 1. Total revenues = ?

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