2-20 Notes BF - particularly income statements o Computing...

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2/20/08 Business Finance Notes Making Capital Investment Decisions Relevant Cash flows o Only cash flows that change due to the project are relevant These are incremental cash flows o The stand-alone principle allows us to analyze each project in isolation from the firm Common types of Cash Flows o Sunk Costs Costs that have accrued in the past o Opportunity Costs Costs of lost options o Side effects Positive Side effects Benefits to other projects Negative Side effects Costs to other projects o Changes in net working capital o Financing Costs o Taxes Pro Forma Statements and Cash Flow o Capital budgeting relies heavily on pro forma accounting statements,
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Unformatted text preview: particularly income statements o Computing Cash flows Operating Cash Flow (OCF) = EBIT +depreciation taxes OCF = Net income +depreciation when there is no interest expense CFFA Example: Replacement Problem o Original Machine Initial Cost =100,000 Annual Depreciation = 9000 Purchased 5 years ago Book Value = 55000 Salvage Today = 65000 Salvage in 5 years = 10000 o New Machine Initial cost = 150000 5 year life Salvage in 5 years = 0 Coast savings = 50000 per year 3-year MACRS depreciation o Required return = 10% o Tax Rate = 40% o...
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This note was uploaded on 04/07/2008 for the course BA 3341 taught by Professor Polkovnichenko during the Spring '08 term at University of Texas at Dallas, Richardson.

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2-20 Notes BF - particularly income statements o Computing...

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