CHAPTER 12 - Capital Budgeting Cash Flow Estimation...

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Capital Budgeting Cash Flow Estimation Incremental, After-tax Cash Flows Cash Flows vs. Accounting Profit After-tax, effect on shareholder wealth Incremental – how cash flows of firm change if project accepted
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Problematic Cash Flows Are never included in incremental cash flows Sunk costs Financing costs Are always included in incremental cash flows Opportunity costs Externalities (cannibalization)
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Other Cash Flow issues Changes in Net Working Capital Show as outflow at beginning of project and inflow at end. Why is this included? Is not “money spent” is just an increased investment during project’s life. It is “recovered” when the asset is not longer in use.
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Depreciation It is not a cash flow, so why include. Don’t really include the depreciation, but have to consider it because it affects taxes, which are a cash flow. Example: Sales 100 100 Cash Expenses 50 50 Depreciation 0 10 EBIT 50 40 Taxes (40%) 20 16 Net Income 30 24 Cash Flow 30 34 (100-50-16)
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Depreciation MACRS – Modified Accelerated Cost Recovery System Depreciation method always used for taxes,
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This document was uploaded on 11/01/2011 for the course FIN 301 at Miami University.

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CHAPTER 12 - Capital Budgeting Cash Flow Estimation...

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