lecture7-350

lecture7-350 - Free Cash Flows in Finance Calculate future...

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Financial management: lecture 7 Free Cash Flows in Finance Calculate future cash flows
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Financial management: lecture 7 Today’s agenda Review what we have learned in the last week How to calculate the cash flows in the future
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Financial management: lecture 7 Some points to remember in calculating free cash flows Depreciation and accounting profit Incremental cash flows Change in working capital requirements Sunk costs Opportunity costs Forget about financing
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Financial management: lecture 7 Cash flows, accounting profit and depreciation Discount actual cash flows Using accounting income, rather than cash flows, could lead to wrong investment decisions Don’t treat depreciation as real cash flows
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Financial management: lecture 7 Example A project costs $2,000 and is expected to last 2 years, producing cash income of $1,500 and $500 respectively. The cost of the project can be depreciated at $1,000 per year. Given a 10% required return, compare the NPV using cash flow to the NPV using accounting income.
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Financial management: lecture 7 Solution (using accounting profit) Year 1 Year 2 Cash Income $1500 $ 500 Depreciation -$1000 -$1000 Accounting Income + 500 - 500 Accounting NPV = 500 1.10 + - = 500 110 32 2 ( . ) $41.
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Financial management: lecture 7 Solution (using cash flows) Today Year 1 Year 2 Cash Income $1500 $ 500 Project Cost -2000 Free Cash Flow -2000 +1500 + 500 14 . 223 $ ) 10 . 1 ( 500 ) 10 . 1 ( 1500 -2000 = NPV Cash 2 1 - = + +
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Forget about financing When valuing a project, ignore how the project is financed. You can assume that the firm is financed
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lecture7-350 - Free Cash Flows in Finance Calculate future...

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