12 Cap budgeting - handout

12 Cap budgeting - handout - Chapter 12: Cash Flows & Other...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 12: Cash Flows & Other Topics in Capital Budgeting
Background image of page 1

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

View Full DocumentRight Arrow Icon
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!
Background image of page 2
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
Background image of page 3

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

View Full DocumentRight Arrow Icon
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
Background image of page 4
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
Background image of page 5

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

View Full DocumentRight Arrow Icon
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
Background image of page 6
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
Background image of page 7

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

View Full DocumentRight Arrow Icon
DEPRECIATION EXAMPLE --MACRS Suppose you purchase a new machine
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/17/2012 for the course FINANCE 301 taught by Professor Jimbrau during the Winter '12 term at BYU.

Page1 / 36

12 Cap budgeting - handout - Chapter 12: Cash Flows & Other...

This preview shows document pages 1 - 9. Sign up to view the full document.

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