WFF&BWFM5013_CFEst-New Project

WFF&BWFM5013_CFEst-New Project - Projects...

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Project’s  Cash Flow Estimation And  Risk
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2 Market Factors/Considerations Economic Conditions Government Regulations and Rules Competitive Environment Firm Factors/Considerations Normal Operations Financing Policy Investing Policy Dividend Policy Investor Factors/Considerations Income/Savings Age/Lifestyle Interest Rates Risk Attitude Net Cash Flows, CF Rates of Return, r = CF 1 (1 + r ) 1 + CF 2 (1 + r ) 2 + ... + CF N (1 + r ) N = N Σ t = 1 CF t (1 + r ) t ^ ^ ^ ^
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3 Cash Flow Estimation Most important and most difficult step in the  analysis of a capital project Financial staff’s role includes: Coordinating other departments’ efforts Ensuring that everyone uses the same set of  economic assumptions Making sure that no biases are inherent in  forecasts
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4 Relevant Cash Flows Cash Flow Versus Accounting Income Cash Flows that contributes to investment  project 
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5 Cash Flow Versus  Accounting Income 2009 Situation    Accounting Profits Cash Flows Sales $50,000     $50,000   Costs except depreciation (25,000) (25,000) Depreciation (15,000)           -- Net operating income or  cash flow           $10,000 $25,000 Taxes based on operating income (30%) (3,000) (3,000) Net income or  net cash flow $7,000 $22,000 Net cash flow =  Net income plus depreciation =  $7,000 + $15,000 = $22,000
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6 Cash Flow Versus  Accounting Income 2013 Situation Accounting Profits Cash Flows Sales $50,000   $50,000   Costs except depreciation (25,000) (25,000) Depreciation (5,000)          -- Net operating income or cash flow $20,000 $25,000 Taxes based on operating income (30%) (6,000) (6,000) Net income or net cash flow $14,000 $19,000 Net cash flow =  Net income plus depreciation  = $14,000 + $5,000 = $19,000
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7 Project’s forecast  Estimated sales for the next 4 years: $30,000 per year Variable cost $18,000 per year Fixed cost   $5,000 per year Installed Asset cost=$10,000, depreciated using MACRS 5-yr class.   Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 20% 32% 19% 12% 12% 5%  2. Determine the operating cash flow.
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8 Capital Budgeting Project Evaluation Expansion Project: Expansion Project:  A project that is intended  to increase sales; provides growth to the firm Replacement Analysis: Replacement Analysis:  An analysis involving  the decision of whether to replace an existing,  still productive asset with a new asset
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9 Rules for Estimating Cash Flow Ignore financing costs Disregard sunk costs Include opportunity costs Include indirect costs Include only incremental cash flows (for  replacement project) Adjust for taxes
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10 Determining Relevant Cash Flows Financing Cost: Financing Cost:
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WFF&BWFM5013_CFEst-New Project - Projects...

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