BFIN620_PPT_CH8_sp09-11 - 8 1 Business Finance 620 Using...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
8- 1 Using Discounted Cash Flows Using Discounted Cash Flows to Make Investment Decisions to Make Investment Decisions Chapter 8 Brealey-Myers-Marcus 5 th Edition Business Finance 620
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8- 2 Topics Covered Pulls together many of the important ideas surrounding investment project analysis: Identifying relevant cash flows Depreciating assets with MACRS Handling inflation Choosing an appropriate cost of capital Discounting relevant cash flows (not income) Calculating and interpreting NPV and IRR Deciding whether to launch a project Case Application – PGA New Venture
Image of page 2
8- 3 Cash Flow vs. Accounting Income Discount actual cash flows. Using accounting income, rather than cash flow, could lead to erroneous decisions. Example A 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.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8- 4 500 - 500 + Income Accounting $1000 - $1000 - on Depreciati 500 $ $1500 Income Cash 2 Year 1 Year $41.32 (1.10) 500 1.10 500 = NPV Accounting 2 = - + Cash Flow vs. Accounting Income Discounting Accounting Income
Image of page 4
8- 5 500 + 1500 + 2000 - Flow Cash Free 2000 - Cost Project 500 $ $1500 Income Cash 2 Year 1 Year Today $223.14 (1.10) 500 (1.10) 1500 2000 = NPV Cash 2 - = + + - Cash Flow vs. Accounting Income Discounting Cash Flow
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
8- 6 Incremental Cash Flows Discount incremental cash flows Include all indirect effects Forget sunk costs Include opportunity costs Remember the investment in working capital Beware of allocated overhead costs Incremental Cash Flow Cash Flow with Project Cash Flow without Project =
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern