Capital Budgeting Cash Flows Prepared by Keldon Bauer FIL 240 Capital Budgeting Decision Capital Budgeting The process of evaluating and selecting long term investments Capital Expenditure An outlay expected to benefit the firm over at least 1 year Operating expenditures benefit the firm over a period less than 1 year Capital Budgeting Decision Steps in the Process 1 2 3 4 5 Proposal generation Review and analysis Decision making Implementation Follow up Basic Terminology Independent versus Mutually Exclusive Unlimited Funds versus Capital Rationing Accept Reject versus Ranking Conventional versus NonConventional Cash Flow Patterns Relevant Cash Flows Incremental Cash Flows Marginal cash flow associated with adopting the proposed project Major Cash Flow Components 1 Initial Cash Flow 2 Operating Cash Flow 3 Terminal Cash Flow Relevant Cash Flows Expansion versus Replacement Decisions Sunk Costs and Opportunity Costs Sunk costs are ignored incremental costs are zero Opportunity costs are includes since they represent costs or revenues forgone 1 Initial Cash Flow Cost of New Asset Include shipping and installation After tax Proceeds from Sale of Old Asset Removal Sale Cleanup costs Net of tax effect Book value tax profit recaptured depreciation 1 Initial Cash Flow Change in Net Working Capital Summary Installed cost of new assets After tax proceeds from sale of old assets Change in net working capital Initial Cash Flow 2 Operating Cash Flows After tax Incremental Cash Flows from Operations Be careful specific under replacement decisions Usually compared to not replacing now After tax usually is earnings less the depreciation shielded tax Generally assume accelerated depreciation See page 94 for MACRS table 2 Operating Cash Flows Summary Operating Cash Flow NOPAT Deprec See page 100 If relevant find the incremental cash flow by finding the difference between the OCF for the proposed project and the OCF of the best alternative what you are currently doing 3 Terminal Cash Flow Proceeds from Sale of Assets Net of sale removal and cleanup Taxes on Sale of Assets Book value and profit Change in Net Working Capital Typically setting net working capital back the way it was Summarizing Relevant CFs Use a cash flow timeline Rather than using the format presented in the text bring net inflows and outflows down Make outflows negative Make inflows positive
View Full Document
Unlocking...