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Capital Budgeting#4 Loose Ends

Capital Budgeting#4 Loose Ends - Capital Budgeting#4 The...

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Capital Budgeting #4 The “Loose Ends” 1
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Cash Flows—They change everything CFs are the RELEVANT INPUTS The “STAND ALONE PRINCIPLE” Project Incremental CFs 2
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What’s In & What’s Out IN Opportunity Costs—what do you give up? Side-Effects—what else changes? EROSION of Sales in existing product line Only applies to Losses directly related to the project Net Working Capital (NWC) OUT SUNK COSTS-cannot be recovered Financing Costs (usually imbedded in DISCOUNT RATE— not CFs 3
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Project Cash Flow Project CFt = OCFt + ∆ NWCt + CAPEXt Relevant Project CF IS NOT Net Income 4
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Examples and Problems Sales = $1,650; CGS = 60% of Sales ($990); Depreciation = 100; Tax rate is 35%. OCF = Net Income + Depn NI = Sales - CGS – Depn (1 –T) NI = (1650 – 990 –100) (1 -- .35) = $ 364 OCF = $ 364 + $100 = $ 464 5
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….. OR….. OCF = EBIT + Depn -- Taxes OCF = (1650 – 990 –100) + 100 --196 (taxes) OCF = $ 464 Remember OCF is always OCF—no matter what method you use to calculate it!!!!
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