Unformatted text preview: Project
Evaluate
We’ll get to this in the next chapter.
For now, we’ll assume that the risk of the
For
project is the same as the risk of the overall
firm.
firm.
If we do this, we can use the firm’s cost of
If
capital as the discount rate for capital
capital
investment projects.
investment Capital Budgeting Steps
3) Accept or Reject the Project
Accept Step 1: Evaluate Cash Flows
Step
a) Initial Outlay: What is the cash flow at “time 0?”
a) Initial
(Purchase price of the asset)
(Purchase
+ (shipping and installation costs)
Current asset>
(Depreciable asset)
(Depreciable
current liabilities
+ (Investment in working capital)
+ Aftertax proceeds from sale of old asset
Aftertax
Net Initial Outlay
Net Step 1: Evaluate Cash Flows
a) Initial Outlay: What is the cash flow at “time 0?”
(127,000)
+ (shipping and installation costs)
(Depreciable asset)
+ (Investment in working capital)
+ Aftertax proceeds from sale of old asset
Net Initial Outlay Step 1: Evaluate Cash Flows
Step
a) Initial Outlay: What is the cash flow at “time 0?”
(127,000)
+ ( 20,000)
(Depreciable asset)
+ (Investment in working capital)
+ Aftertax proceeds from sale of old asset
Net Initial Outlay Step 1: Evaluate Cash Flows
a) Initial Outlay: What is the cash flow at “time 0?”
(127,000)
+ ( 20,000)
(147,000)
+ (Investment in working capital)
+ Aftertax proceeds from sale of old asset
Net Initial Outlay Step 1: Evaluate Cash Flows
Step
a) Initial Outlay: What is the cash flow at
“time 0?”
(127,000)
+ (20,000)
(147,000)
+ (4,000)
+ Aftertax proceeds from sale of old asset
Net Initial Outlay Step 1: Evaluate Cash Flows
a) Initial Outlay: What is the cash flow at “time
0?”
(127,000)
+ (20,000)
(147,000)
+ (4,000)
+
0
Net Initial Outlay Step 1: Evaluate Cash Flows
a) Initial Outlay: What is the cash flow at “time 0?”
(127,000)
+...
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 Spring '14
 Finance, Depreciation, Net Present Value, Generally Accepted Accounting Principles

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