BFIN620_PPT_CH8_sp09-11

BFIN620_PPT_CH8_sp09-11 - 8- 1Using Discounted Cash...

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Unformatted text preview: 8- 1Using Discounted Cash FlowsUsing Discounted Cash Flowsto Make Investment Decisionsto Make Investment DecisionsChapter 8Brealey-Myers-Marcus5thEditionBusiness Finance 6208- 2Topics CoveredPulls together many of the important ideas surrounding investment project analysis:Identifying relevant cash flowsDepreciating assets with MACRSHandling inflationChoosing an appropriate cost of capitalDiscounting relevant cash flows (not income)Calculating and interpreting NPV and IRRDeciding whether to launch a projectCase Application – PGA New Venture8- 3Cash Flow vs. Accounting IncomeDiscount actual cash flows.Using accounting income, rather than cash flow, could lead to erroneous decisions.ExampleA project costs $2,000 and is expected to last two years. The project will produce 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 NPV using cash flow to the NPV using accounting income.8- 4500-500+IncomeAccounting$1000-$1000-onDepreciati500$$1500IncomeCash2Year1Year$41.32(1.10)5001.10500=NPVAccounting2=-+Cash Flow vs. Accounting IncomeDiscounting Accounting Income8- 5500+1500+2000-FlowCashFree2000-CostProject500$$1500IncomeCash2Year1YearToday$223.14(1.10)500(1.10)15002000=NPVCash2-=++-Cash Flow vs. Accounting IncomeDiscounting Cash Flow8- 6Incremental Cash FlowsDiscount incremental cash flowsInclude all indirect effectsForget sunk costsInclude opportunity costsRemember the investment in working capitalBeware of allocated overhead costsIncremental Cash FlowCash FlowwithProjectCash FlowwithoutProject=–8- 7Net Working Capital InvestmentInvestment in inventories and receivables:Should be included...
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This note was uploaded on 10/10/2011 for the course BUSINESS 620 taught by Professor Paul during the Spring '11 term at Ohio State.

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BFIN620_PPT_CH8_sp09-11 - 8- 1Using Discounted Cash...

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