Chapter 6
2. We will use the bottom-up approach to calculate the operating cash flow for each year. We also must
be sure to include the net working capital cash flows each year. So, the net income and total cash flow
each year will be:
Year 1
Year 2
Year
Chapter 5
3. When we use discounted payback, we need to find the value of all cash flows today. The value today
of the project cash flows for the first four years is:
Value today of Year 1 cash flow = $5,000/1.14 = $4,385.96
Value today of Year 2 cash flo
Chapter 7
5. If we purchase the machine today, the NPV is the cost plus the present value of the increased cash
flows, so:
NPV0 = $2,900,000 + $475,000(PVIFA9%,10)
NPV0 = $148,387.41
We should not necessarily purchase the machine today. We would want to p
Chapter 2
3. To find the book value of current assets, we use: NWC = CA CL. Rearranging to solve for current
assets, we get:
CA = NWC + CL = $800,000 + 2,400,000 = $3,200,000
The market value of current assets and net fixed assets is given, so:
Book value
AF 3313 Business Finance
Lecture 7
Risk and Return
Capital Market Theory
We have covered capital budgeting for the first half
of our course.
One things that you should notice, you are given
the discount rate (cost of capital) every time.
Questions:
Wh
AF 3313 Business Finance
Lecture 11
Cash Management
Issues with Net Working Capital
Net Working Capital (NWC) = CA - CL
CA
Cash
Receivables
Inventory
Payables
CL
Therefore, we can management our Net Working
Capital by managing each of its components.
AF
AF 3313 Business Finance
Lecture 9
Cost of Capital
What is cost of capital?
When we are evaluating projects using the NPV investment
rules, we need to discount cash flow using cost of capital.
Cost of capital reflects the riskiness of the cash flows
inv
AF 3313 Business Finance
Lecture 13
Review
Net Working Capital: CA- CL
NWC Management
$
Capital Budgeting
Decisions
$
A Corporation
Current Asset
Current Liabilities
Liabilities Capital Structure
Assets Long term debt Decision
Fixed Asset
$
Equity
Equity
AF 3313 Business Finance
Lecture 8
Portfolio Theory
Three levels of analyses
We need two statistics to describe return of
an asset - E(r) and (r) expected value
and standard deviation
You should be able to calculate E(r) and
(r) for different kinds of as
Chapter 2
Financial Statements and Cash Flow
Key Concepts and Skills
Understand the information provided by
financial statements
Know the difference between accounting
income and cash flow
Calculate a firms cash flow
Chapter Outline
2.1 The Balance She
AF 3313 Business Finance
Lecture 12
Receivable, Inventory and
Payable Management
Components of Credit Policy
Terms of sale
Credit period
Cash discount and discount period
Type of credit instrument
Credit analysis distinguishing between good
customers
AF 3313 Business
Finance
Lecture 6
Valuation of Bonds & Stocks
Stocks and Bonds
Time Value of Money (TVM) could be applied to a
number of different situations, which include the
pricing of stocks and bonds.
Stocks and Bonds are securities issued by firm
AF 3313 Business Finance
Lecture 10
Short-Term Finance and
Planning
Overview of Working Capital
Most projects require the firm to invest in
net working capital. The main components
of net working capital are
cash,
inventory,
receivables, and
payables