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Lecture 4 Operating Cash Flows

Lecture 4 Operating Cash Flows - The Capital Investment...

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The Capital Investment Process An In-Depth Treatment of the Capital Investment Process A framework for understanding how corporations choose to allocate their funds over various investment opportunities . Relevant to anyone seeking to advance an idea or agenda within the firm Can be applied to decisions ranging from …..replacing equipment …..to purchasing an entire firm Mergers and Acquisitions The Process Projects are represented as cash flow timelines $ $ $ $ $ k 0 1 2 3 4 Projects Classified and Evaluated (decision methods and rules applied) Decisions Made Follow Up
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Types of Projects Independent Projects have no impact on each other Dependent Projects do impact each other’s cash flows Kodak printers and Kodak film and cameras (+) digital cameras and film-based cameras (-) Mutually Exclusive Projects – only one of a pool of projects can be pursued Types of Cash Flows ICF: cash flows related to implementing the project OCF: cash flows realized in operating years TCF: cash flows after the project is terminated ICF OCFs TCF a b c a: time at which decision is being made b: time at which production starts c: time at which production ends ICF OCF 1 OCF 2 OCF 3 OCF 4 +TCF
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0 1 2 3 4 1. Project Cash Flow Calculation: OCF’s To determine whether a project is a viable investment, we need to identify the actual cash flows Using these cash flows, we then compute an NPV which measures the amount of excess value that the capital investment creates relative to a fair financial investment. Example Project : Consider a new project…. suppose that you had created estimates for some basic accounting entries sales (S), expenses (E), depreciation (D) and interest expenses (I)….all in millions of dollars. Year 1 Year 2 Year 3 Year 4 S 30 100 100 40 E 12 37.9 37.9 28.9 D 5 5 5 5 I 12 12 12 12 You also have some other estimated data for the project: The new project will hurt the company’s existing product lines to the tune of 5 cents (in after-tax cash) per each dollar of new sales revenue that it generates.
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