06 Fin 301 Cash flow estimation and CCA Ulearn

06 Fin 301 Cash flow estimation and CCA Ulearn - CASH FLOW...

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1 CASH FLOW ESTIMATION 2 Valuation Model = + = T t t t RRR CF P 0 0 ) 1 ( ± We need cash flow estimates!! ± Project types: ± Cost Saving (replacement decisions) ± Revenue Expansion (new assets) ± Both should increase cash flow 3 Considerations ± Earnings ± Earnings: accounting concept ± Dollar “as earned” versus dollar in hand ± Depreciation expense ± Cash Flows ± Include CF’s in period they occur ± No accruals! ± Incremental Cash Flows: with and without project ± Overhead? ± Cash Flows are NOT Earnings!
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2 4 Other Considerations ± Include taxes ± Exclude sunk costs ± Include opportunity costs ± Consider investments in working capital ± Be consistent in your treatment of inflation ± Consider relationships between projects, and interaction with existing assets ± Mutually Exclusive / Independent ± Complementary / Substitute 5 Sunk Costs – That Sinking Feeling ± 1912: White Star Lines spends £100,000 on equipment intended for the Titanic’s 2 nd voyage ± 1913: invest £50,000 to adapt it to Britannic (equipment will work only on Titanic’s sister ship) ± Expected 1914 cash flow from project: £72,000 ± RRR = 20% ± NPV = £72,000/1.2 – £50,000 = £10,000 > 0 Accept !! ± Wait a minute: spent £100,000 in 1912 so NPV is: £60,000 – £170,000 = – $110,000 (or is it?) 6 Opportunity Costs ± Case 1: buy land for $400,000 ± Case 2: use plot you currently own ± Acquired for: $300,000 ± Market value: $450,000 Cost of land: need plot of land to build McDonald’s – 450,000 450,000 0 Own – 400,000 0 – 400,000 Buy Net CF Cash flow w/o project Cash flow w/ project
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3 7 Net Working Capital ± Accrual v.s. cash ± Receivables collected (RC) = Sales booked (S)?
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06 Fin 301 Cash flow estimation and CCA Ulearn - CASH FLOW...

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