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Unformatted text preview: flows attributable to the proposed project. They represent, in a cash flow sense, how much better or worse off the firm will be if it
chooses to implement the proposal.
The relevant cash flows for Powell Corporation’s proposed replacement expenditure can now be shown graphically, on a time line. Note that because the new
asset is assumed to be sold at the end of its 5-year usable life, the year-6 incremental operating cash inflow calculated in Table 8.9 has no relevance; the terminal cash flow effectively replaces this value in the analysis. As the following time
line shows, the relevant cash flows follow a conventional cash flow pattern. Time line for Powell
cash flows with the
proposed machine $26,480 $57,680 $55,600 $61,200 1 2 3 4 $ 55,000 Terminal Cash Flow
73,200 Operating Cash Inflow
$128,200 Total Cash Flow 0 $221,160
End of Year 5 378 PART 3 Long-Term Investment Decisions Techniques for analyzing conventional cash flow patterns to determine
whether to undertake a proposed capital investment are discussed in Chapter 9. Review Question
8–16 Diagram and describe the three components of the relevant cash flows for
a capital budgeting project. S U M M A RY
FOCUS ON VALUE
A key responsibility of financial managers is to revi...
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This document was uploaded on 01/19/2014.
- Fall '13