Chapter 8 Slides

Chapter 8 Slides - 8-1Finance 38Chapter Eight Using...

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Unformatted text preview: 8-1Finance 38Chapter Eight Using Discounted Cash Flow Analysis to Make Investment Decisions8-2Finance 3Topics CoveredDiscounted Cash Flows, Not Discounted ProfitsIncrementalCash FlowsTreatment of Inflation address, but NOT USESeparation of Investment & Financing DecisionsExamplesLots of examples8-3Finance 3OCF operating cash flowsThe net CASHcoming in or going out due to operating the project (or whatever you are looking at).CF0 includes start-up costs, opportunity costs,. But nothing from operationsCF the last yearincludes operating cash flows, but may also include net working capital, salvage value of PPE,All the rest of the CFs between 0 and last usually only include operations. We use an abbreviated Income Statement to track the cash.8-4Finance 3Preview of the tools Time lines Helps keep track of when and how big the cash flows are. For example a 4-year projectCF0CF1CF2CF3CF4Includes start-up costs = equipment factory opportunity but NO operationsUsually these CFs only include operating things like sales(revenue), fixed/variable costs, taxes. Goal is to find what happens to CASH!All of the operations from CF1-3 also here, but may include things like salvage or unwinding exp.8-5Finance 3Preview of the tools Cash StatementWe want to know CASH flowsRevenue (Sales)How much CASH you take in before any expenses = checks depositedCostsHow much CASH it costs you to get the above sales = checks writtenDepreciationThis is not cash, but subtracted just to calculate taxes = NO check written=EBITEarnings Before Interest and Taxes used to calculate taxTaxesIn this class it will always be 34 % of EBIT = write IRS a check= CASH=Net Income=EBIT Taxes. + DepreciationDepreciation is not cash, no check was written, we still have this money=OCFOperating Cash Flow. This IS the CASH we are looking for. 8-6Finance 3Incremental Cash FlowsDiscount incrementalcash flowsInclude All Indirect EffectsForget Sunk CostsInclude Opportunity CostsRecognize the Investment in Working CapitalBeware of Allocated Overhead CostsIncremental Cash FlowCash Flow With ProjectCash Flow Without Project=8-7Finance 3Forget Sunk CostsThe cost of test marketing that is already spent is an example of a sunk cost.It doesnt matter if money has changed hands yet or not.Remember: Looking at cash making a decision today yesterday is gone. The critical thing is whether or not the cost changes with or without the project. 8-8Finance 3Include Opportunity CostsWould it cost me anything to loan you my car for 4 years?Would it cost my firm anything to use an empty warehouse that we own for a new project?...
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Chapter 8 Slides - 8-1Finance 38Chapter Eight Using...

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