10-Cash-flow-estimation - Copy

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

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Cash Flow Estimation 1 Relevant cash flows Working capital treatment Unequal project lives Abandonment value Inflation Project Cash Flow Estimation
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Cash Flow Estimation 2 Cost: $200,000 + $10,000 shipping + $30,000 installation. Depreciable cost $240,000. Inventories will rise by $25,000 and payables will rise by $5,000. Economic life = 4 years. Salvage value = $25,000. MACRS 3-year class. Proposed Project
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Cash Flow Estimation 3 Incremental gross sales = $250,000. Incremental cash operating costs = $125,000. Tax rate = 40%. Overall cost of capital = 10%.
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Cash Flow Estimation 4 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 5 = Corporate cash flow with project minus Corporate cash flow without project Incremental Cash Flow
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Cash Flow Estimation 6 NO! The costs of capital are already incorporated in the analysis since we use them in discounting. 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 7 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 8 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. 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 9 Yes! The effects on the other projects’ CFs is an externality . Net CF loss per year on other lines
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10-Cash-flow-estimation - Copy - Project Cash Flow...

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