Cash Flow Estimation in Capital Budgeting

Cash Flow - Cash Flow Estimation Stony Brook College of Business BUS 330 V Giardini CAPITAL BUDGETING TWO PROCESSES CAPITAL Estimate Incremental

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Cash Flow Estimation Cash Flow Estimation Stony Brook College of Business BUS 330 V. Giardini
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CAPITAL BUDGETING: TWO PROCESSES CAPITAL BUDGETING: TWO PROCESSES Estimate Incremental Cash Flows Associated with Every Project Difficult, subjective and sometimes arbitrary Takes judgment and experience Evaluate Estimates Using Techniques Like NPV and IRR Straightforward given cash flow estimates Little ambiguity or risk of error
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THE GENERAL APPROACH TO THE GENERAL APPROACH TO CASH FLOW ESTIMATION CASH FLOW ESTIMATION Some Helpful Hints Think through the events a project will bring about, and write down the future financial implications of each Forecasts for new ventures tend to be the most complex Pre-startup, the initial outlay: Enumerate pre-start expenses after tax and all assets that must be purchased. Sales Forecast Sales Forecast Forecast incremental units over time in spreadsheet form Extend by prices for revenues
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Cost of Sales and Expenses: Base costs and expenses on some assumed relationship with forecast incremental revenues Assets: Plan new assets whenever they're expected to be acquired Include working capital Depreciation: Plan depreciation for new assets It's a non-cash item but impacts taxes Taxes and Earnings Summarize tax deductible items in each period to calculate the project's impact on taxes and earnings Treat incremental taxes like any other cash flow item
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Require the same elements as new ventures but generally fewer and simpler Replacement projects Generally save cost without generating new revenue Savings are planned over future periods along with required assets The Typical Pattern Outflows first followed by inflows
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This note was uploaded on 02/15/2012 for the course GERM 200 taught by Professor Kuhmar during the Spring '10 term at SUNY Albany.

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Cash Flow - Cash Flow Estimation Stony Brook College of Business BUS 330 V Giardini CAPITAL BUDGETING TWO PROCESSES CAPITAL Estimate Incremental

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