1 / 12

Capital Budgeting Cash Flows

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.

lam
Download Presentation

Capital Budgeting Cash Flows

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Capital Budgeting Cash Flows Prepared by Keldon Bauer FIL 240

  2. 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.

  3. Capital Budgeting Decision • Steps in the Process: • Proposal generation. • Review and analysis. • Decision making. • Implementation. • Follow-up.

  4. Basic Terminology • Independent versus Mutually Exclusive. • Unlimited Funds versus Capital Rationing. • Accept-Reject versus Ranking . • Conventional versus Non-Conventional Cash Flow Patterns.

  5. Relevant Cash Flows • Incremental Cash Flows: • Marginal cash flow associated with adopting the proposed “project.” • Major Cash Flow Components: • Initial Cash Flow • Operating Cash Flow • Terminal Cash Flow

  6. 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.

  7. 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.

  8. 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

  9. 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.

  10. 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).

  11. 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.

  12. 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.

More Related