IEMS 326 Notes05DCF1

IEMS 326 Notes05DCF1 - -$1,000 investment in ice cream...

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Discounted Cash Flow Analysis IEMS 326 Lecture 5
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Piecing Cashflow Together Investment: subtract. Salvage value: add. Sales / Revenue: add . Expenses / Costs: subtract . Tax: subtract . Depreciation: ignore . Profit (before or after tax): ignore . Depreciation, profit matter only through tax.
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Cashflow Cashflow = Revenue + Salvage – (Expenses + Tax + Investment) O perating C ash F low = Revenue – Expenses Pretax Profit = OCF – Depreciation + (Salvage – Book Value) Tax = (Pretax Profit)*T Cashflow = (OCF + Salvage )*(1-T) + (Depreciation + Book Value )*T – Investment
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Working Capital Is a form of investment , e.g. in: inventory : spend money to make before you sell accounts receivable : book revenue before collected Important because of time value of money . No impact on profit, depreciation, tax Example: invest $10,000 in ice cream truck, $1,000 in ice cream. each year: truck depreciates at end in 5 years: salvage truck,
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Unformatted text preview: -$1,000 investment in ice cream inventory DCF: NPV as a Way of Life The art of NPV modeling . Use judgment about expectations (average case). Include the important features, not all details. Evaluate incremental cashflows. not accounting profits (compute to learn taxes) include all indirect effects exclude non-effects Incremental Cash Flows What are the differences between alternatives ? sunk cost: of an irreversible investment overhead cost: a share of a communal expense opportunity cost: of using a resource which could be sold or allocated to another activity Sunk vs. Opportunity Costs A sunk cost is spilled milk . Sunk costs are common to all alternatives. Ignore sunk costs of resources used. Consider opportunity costs of resources that could be sold or used elsewhere....
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This note was uploaded on 04/07/2008 for the course IEMS 326 taught by Professor Staum during the Winter '07 term at Northwestern.

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IEMS 326 Notes05DCF1 - -$1,000 investment in ice cream...

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