FINANCIAL MANAGEMENT BY FINMANCapital budgeting cash flows diorella badel
CAPITAL BUDGETING CASH FLOWS
MAJOR CASH FLOW COMPONENTS
Initial investment - The relevant cash outflow for a
proposed project at time zero.
Operating cash inflows - The incremental after-tax
cash inflows resulting from implementation of a
project during its life.
Terminal cash flow - The after-tax non-operating
cash flow occurring in the final year of a project. It is
usually attributable to liquidation of the project.
cost of new asset - The net outflow necessary to acquire a new asset.
installation costs - Any added costs that are necessary to place an asset into
installed cost of new asset - The cost of new asset plus its installation costs;
equals the asset’s depreciable value.
after-tax proceeds from sale of old asset - The difference between the old
asset’s sale proceeds and any applicable taxes or tax refunds related to its sale.
proceeds from sale of old asset - The cash inflows, net of any removal or
cleanup costs, resulting from the sale of an existing asset.
tax on sale of old asset - Tax that depends on the relationship between the
old asset’s sale price and book value and on existing government tax rules.
book value - The strict accounting value of an asset, calculated by subtracting
its accumulated depreciation from its installed cost.
net working capital - The difference between the firm’s current assets and its
change in net working – capital The difference between a change in current
assets and a change in current liabilities.
After receiving a sizable bonus from her employer, Tina Talor is
contemplating the purchase of a new car. She feels that by
estimating and analyzing its cash flows she could make a more
rational decision about whether to make this large purchase.
Tina’s cash flow estimates for the car purchase are as follows:
Negotiated price of new car $23,500
Taxes and fees on new car purchase $ 1,650
Proceeds from sale of old car $ 9,750
Estimated value of new car in 3 years $10,500
Estimated value of old car in 3 years $ 5,700
Estimated annual repair costs on new car (in warranty)
Estimated annual repair costs on old car $ 400
Using the cash flow estimates, Tina calculates the initial investment,
operating cash inflows, terminal cash flow, and a summary of all cash
flows for the car purchase.
the many intangible benefits of owning a car. Whereas the fuel cost and basic
transportation service provided are assumed to be the same with the new car as with
the old car, Tina will have to decide if the cost of moving up to a new car can be justified
in terms of intangibles, such as luxury and prestige.