Prepared by Diane Tanner University of North Florida

1. Chapter 17 Cash Flows in Capital Budgeting Decisions Prepared by Diane Tanner University of North Florida

2. Cash Flows in Capital Budgeting • Only incremental amounts considered • Two categories of cash flows needed • Operating activities • Activities which occur as a result of business operations during the year • Found on the income statement • Investing activities • Acquisition and disposition of long term assets • Cash received from sale of long term assets

3. Operating Cash Flows Forms Cash Basis Accrual Basis Provides the cash inflows and cash outflows Provides the amounts earned and amounts incurred; An indicator of real profits

4. Operating Activities • Inflows • Receipts from customers • Cash received from investments (dividends revenue and interest revenue) • Outflows • Payments for merchandise • Payments for income taxes • Payments for interest costs • Payments for all other operating expenses

5. Investing Activities • Inflows • Cash from selling long-term assets • Plant assets • Intangible assets • Collecting principal on loans receivable • Outflows • Cash from selling long-term assets • Plant assets • Intangible assets • Loaning money to others (note receivable)

6. Financing Activities • Inflows • Cash received from issuing stock • Cash from issuing bonds payable • Issuing short- and long-term notes payable (if not used for operations) • Outflows • Pay cash dividends • Purchasing treasury stock • Repaying non-operating loans – principal only

7. Capital Budgeting Assumptions • Assume all revenue is received in the period earned • i.e., Revenue = cash inflows • Assume that all expenses incurred are paid in the same period • i.e., All possible cash expenses = cash outflows • Non-cash items that are never paid • Depreciation expense • Amortization expense • Gains on disposal of long term assets • Losses on disposal of long term assets

8. Calculating Operating Cash Flows • Begin with net income and remove items that are not cash flows: • Add • Noncash expenses (e.g., depreciation, amortization) • Decreases in current assets • Increases in current liabilities • Losses • Subtract • Increases in current assets • Decreases in current liabilities • Gains

9. Investing Cash Flows • Primary investing cash flows with capital budgeting • Purchase of investment assets at year 0 • Sales of investment assets • If sold at end of useful life, salvage value is the cash flow at the end of the useful life • If sold before the end of the useful, a gain or loss will likely occur • Selling price – Book value = Gain if positive • Selling price – Book value = Loss if negative • Selling price = cash flow • Gain/loss is NOT a cash flow

11. Depreciation Tax Shield • Depreciation is not a cash flow • Indirect effects of depreciation • Reduces the amount of tax a company must pay---saves cash • Tax savings called a depreciation tax shield= Depreciation expense*tax rate

12. The End