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CHAPTER 12 Cash Flow Estimation and Risk Analysis

Proposed Project. Total depreciable costEquipment: $200,000Shipping: $10,000Installation: $30,000Changes in working capitalInventories will rise by $25,000Accounts payable will rise by $5,000Effect on operationsNew sales: 100,000 units/year @ $2/unitVariable cost: 60% of sales. Proposed Pro

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CHAPTER 12 Cash Flow Estimation and Risk Analysis

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    1. CHAPTER 12 Cash Flow Estimation and Risk Analysis Relevant cash flows Incorporating inflation Types of risk Risk Analysis

    2. Proposed Project Total depreciable cost Equipment: $200,000 Shipping: $10,000 Installation: $30,000 Changes in working capital Inventories will rise by $25,000 Accounts payable will rise by $5,000 Effect on operations New sales: 100,000 units/year @ $2/unit Variable cost: 60% of sales

    3. Proposed Project Life of the project Economic life: 4 years Depreciable life: MACRS 3-year class Salvage value: $25,000 Tax rate: 40% WACC: 10%

    4. Determining project value Estimate relevant cash flows Calculating annual operating cash flows. Identifying changes in working capital. Calculating terminal cash flows.

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