Chapter 7 lecture

Add back depreciation since it is the only add non

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Unformatted text preview: Tax rate = 30% 17 Sally & Dave’s Condo – Setting up the pro-forma income statement (note Setting that this is a simple case with each years cash inflow being equal): inflow 18 Sally & Dave’s Condo Sally – Annual cash flow can be calculated in two Annual ways: ways: 1. Add back depreciation (since it is the only Add non-cash flow considered in the pro-forma calculation) calculation) 2. Leave depreciation out of the calculation 1. Sum up the net income without depreciation 2. Add to it the value of depreciation tax shield Add (=annual depreciation x tax rate) Reference (Example): File: Pfe_chap07.xls Worksheet: “page 169-172” , “page 172,middle” 19 Sally & Dave’s Condo – Once CFs have been estimated, we can Once calculate the NPV & the IRR calculate – However, the condo should have some value However, after 10 years after 20 Terminal Value – After-tax terminal cash flow will consist of: • Estimated sale price • Taxes paid on the difference between the sale price Taxes and the book value and • In Sally & Dave’s case: – Estimated resale = $80,000 – Book value = 0 (since using simplified straight-line method Book of depreciation) of – Taxes = (80,000)(.3) = $24,000 – After-tax terminal cash flow = 80,000 – 24,000 = $56,000 – Besides the last cash flow, this too is expected at the end Besides of year 10 21 Sally & Dave’s Condo Reference (Example): File: Pfe_chap07.xls Worksheet: “page 173-174” 22 Opportunity Cost Opportunity • Please review section 7.10 • (This is your assignment – no (This submission required) submission • It is important that you do this exercise. Reference (Example): File: Pfe_chap07.xls Worksheet: “page 181” , “page 183” 23 Recommended Problems Problems • Chapter 7: 1, 2, 9, 10, 12, 15, 17, 19 24...
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