CapBudget - handout

# CapBudget - handout - Chapter 12: Cash Flows & Other Topics...

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Chapter 12: Cash Flows & Other Topics in Capital Budgeting

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Mind Map Why?: In the last topic area, we discussed how to evaluate a project’s cash flows. However, before we can evaluate cash flows we must first estimate these cash flows. This topic focuses on how to estimate cash flows given revenue and operating expense data. Note: this is the hard part!
Mind Map Learning objective: Develop an understanding of which cash flows are important in the capital budgeting process Calculate depreciation expense and tax impacts Estimate the free cash flows from a potential investment project Given appropriate data, determine whether an investment project will increase the value of the firm

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Mind Map Key words/concepts: Incremental costs (sunk cost, opportunity costs, etc) Straight-line and MACRS depreciation Taxes: income and asset sale Initial outlay, annual CFs, terminal CFs Working capital changes Capital rationing Equivalent annual annuity
STUFF YOU NEED TO KNOW --RELEVANT CASH FLOWS Incremental CFs: cash in minus cash out Incidental CFs » Directly and indirectly related Sunk costs » Don’t matter Opportunity costs » Matter

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STUFF YOU NEED TO KNOW --Old Test Question Marshall’s & Co. purchased a corner lot in Eglon City five years ago at a cost of \$640,000. The lot was recently appraised at \$810,000. At the time of the purchase, the company spent \$50,000 to grade the lot and another \$4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at \$1.2 million. What amount should be used as the initial cash flow for this building project? a. \$1,200,000 b. \$1,840,000 c. \$1,890,000 d. \$2,010,000
STUFF YOU NEED TO KNOW --DEPRECIATION EXPENSE Two methods: MACRS Depr Xp = cost x percentage percentage determined by life (see tax code) cost, or basis, never changes Straight-line Depreciation XP = (cost - salvage)/ life

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DEPRECIATION EXAMPLE --MACRS Suppose you purchase a new machine for \$100. The machine is in the 3 year
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## This note was uploaded on 10/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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CapBudget - handout - Chapter 12: Cash Flows & Other Topics...

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