Module 9 - Chapters 12-13 - FIN 3403

Module 9 - Chapters 12-13 - FIN 3403 - CHAPTERS 12...

Info iconThis preview shows pages 1–17. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTERS 12 & 13 Cash Flow Estimation and Risk Analysis Real Options and Other Topics in Capital Budgeting Cap ital Bud geting FIN 3403- Bus iness Financ e Bas ics Othe r Topi cs Project s with Une qual Lives MA CRS Dep reciation Inflation Cas h Flow Estima tion Risk Ana lysis Rea l Opt ions Cap ital Rat ioning Dec ision Trees Exam ple Factors to Consider Cash flow vs. accounting income After-tax basis for cash flows Financing charges not included Treat inflation consistently Other Factors to Consider Incremental cash flows Sunk costs Opportunity costs Externalities (cannibalization) Shipping and installation Changes in working capital Incremental Cash Flow Components of a projects incremental cash flow include: Costs: Initial investment outlays Benefits: Operating cash flows (net) Terminal cash flows Cash Flow Estimation Income Cash Flow Revenue $100.00 $100.00 Depreciation-$20.00--- Other Costs-$40.00-$40.00 EBT $40.00--- Taxes (40%)-$16.00-$16.00 NOPAT $24.00 $44.00 Cash Flow Estimation OCF = NOPAT + Depreciation OCF = $24.00 + $20.00 = $44.00 OCF = (R - C)(1-T) + TD OCF = ($100 - $40)(1-.40) + ($20)(.40) OCF = $44.00 Depreciation History Pre 1954: Straight line only 1954: Accelerated options Double-declining balance Sum-of-the-years digits 1981: Introduction of ACRS 1986: Change to MACRS MACRS Depreciation Class life or recovery class Half-year convention Depreciable basis Section 179 expense Straight line option MACRS Depreciation Year Deduction Phaseout 2011 $500,000 $2,000,000 2010 $500,000 $2,000,000 2009 $250,000 $800,000 2008 $250,000 $800,000 2007 $125,000 $500,000 2006 $108,000 $430,000 2005 $105,000 $420,000 2004 $102,000 $410,000 2003 $100,000 $400,000 2002 $24,000 $200,000 2001 $24,000 $200,000 2000 $20,000 $200,000 Section 179 Expense MACRS Classes 3-year 5-year 7-year 10-year 27.5-year (straight line only) 39-year (straight line only) Cost Section 179 Depreciable basis 110,000- 10,000 100,000 Class: 5-year MACRS life Depreciable life: 6 years MACRS Depreciation Year Percent Depreciation 1 2 3 4 5 6 20 32 19 12 11 6 20,000 32,000 19,000 12,000 11,000 6,000 100,000 MACRS Depreciation Base percent (100/5)*(2) 40.0% Year 1 Year 2 Year 3 Year 4 40/2 (100-20)(.40) (80-32)(.40) (48-19)(.40) 20% 32% 19% 12% Percentages for MACRS Year 5 Year 6 (17/1.5) (17 - 11) 11% 6% Remaining depreciable life Remaining value 1.5 17,000 (17)(.40) (17/1.5) 7 11 (straight line) Percentages for MACRS Questions What happens if a company decides to depreciate its fixed assets over 7 years instead of 10 years? Physical assets would not be affected....
View Full Document

Page1 / 106

Module 9 - Chapters 12-13 - FIN 3403 - CHAPTERS 12...

This preview shows document pages 1 - 17. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online