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Finance I

Finance I. October 12. Topics covered. Incremental cash flow: terminologies Project evaluation Example case study. Incremental Cash Flows: Concepts. Incremental cash flow Sunk Cost Opportunity cost. Incremental Cash Flows: Concepts. Side effects Allocated costs. Project Evaluation .

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Finance I

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  1. Finance I October 12 Qinglei Dai for FEUNL

  2. Topics covered • Incremental cash flow: terminologies • Project evaluation • Example case study Qinglei Dai for FEUNL

  3. Incremental Cash Flows: Concepts • Incremental cash flow • Sunk Cost • Opportunity cost Qinglei Dai for FEUNL

  4. Incremental Cash Flows: Concepts • Side effects • Allocated costs Qinglei Dai for FEUNL

  5. Project Evaluation • Use NPV rule to evaluate the project. • Need to find out cash flows for the entire project. Qinglei Dai for FEUNL

  6. Project Evaluation Qinglei Dai for FEUNL

  7. Project Evaluation • Net working capital • Current asset minus current liabilities • Current asset: Qinglei Dai for FEUNL

  8. Project Evaluation • Change in NWC • Increase in working capital: • Decrease in working capital: Qinglei Dai for FEUNL

  9. Project Evaluation • Evaluation of the project with NPV Qinglei Dai for FEUNL

  10. The Boeing 777 Example • In late 1990, the Boeing Company announced its intention to build the Boeing 777. • Analysts believed the up-front investment and R&D expenditure would be as much as $8 billion. • Delivery of the planes was expected to begin in 1995 and to continue for 35 years. Qinglei Dai for FEUNL

  11. The Boeing 777 Example • Table 7.5 shows the incremental cash flows of the project: Qinglei Dai for FEUNL

  12. Qinglei Dai for FEUNL

  13. The Boeing 777 Example • The NPV of the project is dependent upon the discount rate. Qinglei Dai for FEUNL

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