This document discusses various topics related to making capital investment decisions, including relevant cash flows for projects, cash flows from accounting numbers, MACRS tax depreciation rules, and sensitivity analysis. It provides examples of calculating net present value from pro forma financial statements and cash flows. It emphasizes that actual future cash flows are unknown and discusses using scenario and sensitivity analysis to account for forecasting risk when evaluating projects.
FINANCIAL MANAGEMENT BY FINMANCapital budgeting cash flows diorella badelMary Rose Habagat
This document discusses key components of capital budgeting cash flows, including initial investment, operating cash inflows, and terminal cash flow. It provides definitions and explanations for calculating each component. For initial investment, it identifies relevant costs such as the new asset cost, installation costs, proceeds from selling the old asset, and taxes. Operating cash inflows represent incremental after-tax cash flows during the asset's life. Terminal cash flow is the after-tax cash flow in the final year, usually from liquidating the asset. The document also includes an example problem calculating these cash flows for a car purchase decision.
The document discusses the statement of cash flows, including its purpose and components. It explains that the statement of cash flows reports an entity's cash flows during a period and fulfills purposes like predicting future cash flows and evaluating management decisions. It describes the three sections of the statement of cash flows - operating, investing, and financing activities - and provides examples of cash inflows and outflows that would be included in each section. The document also covers the direct and indirect methods for preparing the statement of cash flows and includes examples of classwork problems preparing the statement of cash flows.
Cash flow estimation ppt @ bec doms on financeBabasab Patil
The document discusses estimating cash flows for capital budgeting projects. It explains that cash flow estimation involves forecasting sales, costs, expenses, assets needed, depreciation, and taxes over time. The general process is the same for new projects, expansions, and replacements, but replacements typically require less estimation. Key steps are outlined for estimating cash flows for new ventures and replacements, including identifying incremental impacts and dealing with subjective estimates.
Capital Budgeting and Estimating Cash FlowsHAMZA Sajid
Capital budgeting is the process of identifying, analyzing, and selecting long-term investment projects. The capital budgeting process involves generating proposals aligned with strategic objectives, evaluating incremental cash flows, and selecting projects using techniques like net present value. Cash flows must be estimated after-tax and incremental for the initial investment, each period, and the terminal year. Depreciation is a non-cash expense that lowers taxes and must be considered along with capital gains/losses when assets are sold.
The document provides an overview of basic financial accounting concepts. It explains that accounting is based on the accounting equation of assets equaling liabilities plus owners' equity. Assets are valuable resources owned, while liabilities are obligations, and owners' equity is the residual interest in assets. Revenues increase owners' equity by providing goods/services, while expenses decrease it by consuming resources to generate revenue. Financial statements like the balance sheet present a company's assets, liabilities, and owners' equity at a point in time.
The document discusses revenue and invoice concepts, generation, and troubleshooting in Oracle Grants Accounting. It describes the key steps to generate revenue like generating draft revenue, reviewing revenue, and releasing revenue. For invoices, it explains generating draft invoices, reviewing and adjusting invoices, approving, and releasing invoices. It also provides an overview of troubleshooting issues that can occur with invoice generation.
The document provides information on preparing a worksheet, the accounting cycle, classified balance sheets, and liquidity ratios. It defines a worksheet and outlines the 5 steps to prepare one. It also explains the steps in the accounting cycle, what a classified balance sheet is, and provides an example balance sheet. Finally, it defines working capital and the current ratio as measures of liquidity.
The document provides an overview of the accounting cycle, which consists of a recording phase and reporting phase. The recording phase involves analyzing transactions, recording them in journals, posting to ledgers, and preparing a trial balance. The reporting phase involves preparing adjusting entries, a post-adjusted trial balance, financial statements, and closing entries. The purpose is to review the basic steps of the accounting process, including journalizing, posting, preparing financial statements, and closing books at the end of each period.
FINANCIAL MANAGEMENT BY FINMANCapital budgeting cash flows diorella badelMary Rose Habagat
This document discusses key components of capital budgeting cash flows, including initial investment, operating cash inflows, and terminal cash flow. It provides definitions and explanations for calculating each component. For initial investment, it identifies relevant costs such as the new asset cost, installation costs, proceeds from selling the old asset, and taxes. Operating cash inflows represent incremental after-tax cash flows during the asset's life. Terminal cash flow is the after-tax cash flow in the final year, usually from liquidating the asset. The document also includes an example problem calculating these cash flows for a car purchase decision.
The document discusses the statement of cash flows, including its purpose and components. It explains that the statement of cash flows reports an entity's cash flows during a period and fulfills purposes like predicting future cash flows and evaluating management decisions. It describes the three sections of the statement of cash flows - operating, investing, and financing activities - and provides examples of cash inflows and outflows that would be included in each section. The document also covers the direct and indirect methods for preparing the statement of cash flows and includes examples of classwork problems preparing the statement of cash flows.
Cash flow estimation ppt @ bec doms on financeBabasab Patil
The document discusses estimating cash flows for capital budgeting projects. It explains that cash flow estimation involves forecasting sales, costs, expenses, assets needed, depreciation, and taxes over time. The general process is the same for new projects, expansions, and replacements, but replacements typically require less estimation. Key steps are outlined for estimating cash flows for new ventures and replacements, including identifying incremental impacts and dealing with subjective estimates.
Capital Budgeting and Estimating Cash FlowsHAMZA Sajid
Capital budgeting is the process of identifying, analyzing, and selecting long-term investment projects. The capital budgeting process involves generating proposals aligned with strategic objectives, evaluating incremental cash flows, and selecting projects using techniques like net present value. Cash flows must be estimated after-tax and incremental for the initial investment, each period, and the terminal year. Depreciation is a non-cash expense that lowers taxes and must be considered along with capital gains/losses when assets are sold.
The document provides an overview of basic financial accounting concepts. It explains that accounting is based on the accounting equation of assets equaling liabilities plus owners' equity. Assets are valuable resources owned, while liabilities are obligations, and owners' equity is the residual interest in assets. Revenues increase owners' equity by providing goods/services, while expenses decrease it by consuming resources to generate revenue. Financial statements like the balance sheet present a company's assets, liabilities, and owners' equity at a point in time.
The document discusses revenue and invoice concepts, generation, and troubleshooting in Oracle Grants Accounting. It describes the key steps to generate revenue like generating draft revenue, reviewing revenue, and releasing revenue. For invoices, it explains generating draft invoices, reviewing and adjusting invoices, approving, and releasing invoices. It also provides an overview of troubleshooting issues that can occur with invoice generation.
The document provides information on preparing a worksheet, the accounting cycle, classified balance sheets, and liquidity ratios. It defines a worksheet and outlines the 5 steps to prepare one. It also explains the steps in the accounting cycle, what a classified balance sheet is, and provides an example balance sheet. Finally, it defines working capital and the current ratio as measures of liquidity.
The document provides an overview of the accounting cycle, which consists of a recording phase and reporting phase. The recording phase involves analyzing transactions, recording them in journals, posting to ledgers, and preparing a trial balance. The reporting phase involves preparing adjusting entries, a post-adjusted trial balance, financial statements, and closing entries. The purpose is to review the basic steps of the accounting process, including journalizing, posting, preparing financial statements, and closing books at the end of each period.
This document provides an overview of price level accounting, which is an accounting technique used to adjust financial statements for inflation. It does this by recording transactions at current prices rather than historical costs. The summary explains that price level accounting aims to provide an accurate picture of profitability and financial position by eliminating the effects of declining money value during inflationary periods. It also outlines some of the techniques used, including the current purchasing power method, replacement cost accounting method, current value accounting method, and current cost accounting method.
CashPerform has a unique offering that facilitates efficiency in the cash conversion cycle to recover cash from suppliers, customers and internal efficiences. This translates into Working Capital Optimisation
This document provides a tutorial on preparing three basic financial statements: the income statement, statement of retained earnings, and balance sheet. It explains the purpose and format of each statement. The income statement reports revenues, expenses and net income for a period. The statement of retained earnings shows the changes in retained earnings from net income and dividends. The balance sheet reports assets, liabilities, and equity as of a point in time. The tutorial also discusses the accounts that make up each statement and the order they should be prepared.
The accounting cycle consists of 9 key steps: (1) analyzing transactions, (2) journalizing transactions, (3) posting to ledger accounts, (4) preparing a trial balance, (5) journalizing and posting adjusting entries, (6) preparing an adjusted trial balance, (7) preparing financial statements, (8) journalizing and posting closing entries, and (9) preparing a post-closing trial balance. The purpose of the accounting cycle is to ensure all financial activities of a business are recorded and reported accurately through a series of processes that track money coming in and going out. Errors can occur if transactions are incorrectly recorded or posted, leading to an unbalanced trial balance that requires adjustment.
This document discusses the accounting standard AS 9 on revenue recognition. It provides definitions for key terms like revenue, gain, and income. Revenue is recognized when risks and rewards of ownership are transferred and the amount can be measured reliably. For services, revenue can be recognized using the percentage of completion or completed contract method. Revenue from interest, royalties, and dividends is recognized on an accrual basis. However, revenue recognition may be postponed if there is uncertainty in collection or other risks. The standard specifies different recognition criteria for domestic versus foreign revenue sources.
The document summarizes accounting concepts related to the recording process. It discusses [1] accounts and how they are used to record transactions, [2] debits and credits and how they affect account balances, and [3] the basic steps in recording transactions, including journalizing, posting to ledgers, and preparing a trial balance.
Guide to Profit and Loss, Balance Sheet & Cash flow statementsStomar
The document discusses three key financial statements:
1) The balance sheet presents the value of a company's assets and liabilities at a point in time.
2) The profit and loss (P&L) statement measures the profit generated over a period of time, though profit is an accounting opinion based on principles.
3) The cash flow statement shows cash inflows and outflows over time, including from profit, investments, and expenses.
Working capital refers to the funds required to operate a business on a day-to-day basis. It is used to acquire current assets such as inventory and accounts receivable. There are various methods to assess working capital requirements, including the operating cycle method, turnover method, and projected balance sheet method. The operating cycle method calculates needs based on the time required to complete the operating cycle from acquiring raw materials to collecting payment from customers. The turnover method, recommended by the Nayak Committee, sets the requirement at 25% of projected annual turnover. Proper validation of projections is important when using the projected balance sheet method for larger businesses.
Fa term paper sanmeet dhokay - 2015 pgpmx025Sanmeet Dhokay
This document provides an overview of key accounting concepts covered over three days:
- Day 1 discusses accounting mechanics like journals, ledgers, trial balances, and financial statements. It also covers the differences between financial and cost accounting.
- Day 2 asks questions to consider in accounting and discusses accounting approaches, transactions, trial balances, and the balance sheet.
- Day 3 covers inventory, the manufacturing process, profit calculations, depreciation methods, and cash flow statements. It also discusses ratios, returns, and feasibility analysis.
The document aims to introduce fundamental accounting topics and how they relate to recording, classifying, summarizing and interpreting business financial information.
This document discusses accounting concepts for managers, including:
1. The trading account is used to calculate gross profit by subtracting the cost of goods sold from sales. Opening and closing inventory are debited and credited, respectively, and purchases less returns are debited.
2. The profit and loss account calculates net profit by subtracting expenses from gross profit. Expenses are debited whether paid or not, and incomes are credited whether received or not.
3. Capital expenditures provide long-term benefits while revenue expenditures only benefit the current year and are debited to the profit and loss account. Trading and profit and loss accounts determine profit or loss over a period.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
The document discusses the cash flow statement, which shows a company's cash generation and cash spending over a period of time. It provides three key sections - cash flow from operating activities, investing activities, and financing activities. Cash flow from operating activities includes cash from sales and payments for expenses. Cash flow from investing activities includes cash from the sale and purchase of property, equipment and investments. Cash flow from financing activities includes cash from issuing stock or debt and paying dividends. The cash flow statement is an important financial report that shows how well a company is generating cash flow over time.
This document discusses accounting standard 9 regarding revenue recognition. It defines revenue as the gross inflow of cash or receivables from the sale of goods, rendering of services, or use of enterprise resources by others. Revenue is recognized when it is earned and realizable, following the revenue recognition and matching principles. The standard provides criteria for revenue recognition such as evidence of an arrangement, delivery, fixed pricing, and collectability. It also discusses types of revenue recognition for different transactions and the effect of uncertainties.
The document discusses cash flows from operating activities. It defines operating activities as any activities that affect a company's results, such as production and generating goods and services. It provides examples of cash inflows from operating activities, such as collecting sales, accounts receivable, and interest. Cash outflows include acquiring raw materials and paying creditors and employees. To calculate net cash flow from operating activities, non-cash expenses and changes in current assets and liabilities are added or subtracted from net income.
The document discusses financial management and management accounting. It defines financial management as measuring and reporting financial and non-financial information to help managers make decisions to fulfill organizational goals. Management accounting also measures and reports this information, but focuses on internal reporting to help managers make decisions. The document outlines the objectives, functions, key themes, and differences between financial and management accounting.
1) Cash flow estimation is necessary for capital budgeting and involves estimating initial investments, operating cash inflows, and terminal cash inflows over the project's economic life.
2) The key principles of cash flow estimation are the incremental principle, separation principle, post-tax principle, and consistency principle. Cash flows should be estimated incrementally, separated by investment and financing sides, on an after-tax basis, and consistently.
3) For expansion projects, the cash flow estimation involves calculating initial investment, operating cash flows over the project life, and terminal year non-operating cash flows from asset sale. For replacement projects, it also involves calculating the cash flows from selling the old asset.
This document discusses key concepts for making capital investment decisions using discounted cash flow analysis. It covers that incremental after-tax cash flows rather than accounting earnings should be considered. Sunk costs and opportunity costs are important factors. Side effects like cannibalism and erosion of existing products also matter. There are different approaches to estimating cash flows such as top-down or tax shield methods. Special cases like cost-cutting proposals, setting bid prices, and investments with unequal lives require additional considerations in the analysis.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
Okay, let's calculate this step-by-step:
* Salvage value of the asset = $600,000
* Book value of the asset in year 4 = $500,000
* Gain on sale of asset = Salvage value - Book value = $600,000 - $500,000 = $100,000
* Tax rate = 30%
* Tax on gain = Gain x Tax rate = $100,000 x 30% = $30,000
* After-tax salvage value = Salvage value - Tax on gain = $600,000 - $30,000 = $570,000
Therefore, the after-tax salvage value of the asset is $570,
This document discusses key considerations for evaluating capital budgeting projects, including relevant cash flows, inflation, and taxes. It emphasizes that only cash flows impacted by a project should be included in analysis and that projections should be based on real cash flows rather than accounting income. Changes to working capital like inventory and accounts receivable/payable represent relevant cash flows. Salvage values and clean-up costs also factor in. Both nominal and real cash flows can be analyzed, and taxes reduce after-tax cash flows and must be accounted for, including capital cost allowance deductions over time. All relevant after-tax cash flows should be included in methods like NPV, IRR, or profitability index to properly evaluate projects.
This document provides an overview of price level accounting, which is an accounting technique used to adjust financial statements for inflation. It does this by recording transactions at current prices rather than historical costs. The summary explains that price level accounting aims to provide an accurate picture of profitability and financial position by eliminating the effects of declining money value during inflationary periods. It also outlines some of the techniques used, including the current purchasing power method, replacement cost accounting method, current value accounting method, and current cost accounting method.
CashPerform has a unique offering that facilitates efficiency in the cash conversion cycle to recover cash from suppliers, customers and internal efficiences. This translates into Working Capital Optimisation
This document provides a tutorial on preparing three basic financial statements: the income statement, statement of retained earnings, and balance sheet. It explains the purpose and format of each statement. The income statement reports revenues, expenses and net income for a period. The statement of retained earnings shows the changes in retained earnings from net income and dividends. The balance sheet reports assets, liabilities, and equity as of a point in time. The tutorial also discusses the accounts that make up each statement and the order they should be prepared.
The accounting cycle consists of 9 key steps: (1) analyzing transactions, (2) journalizing transactions, (3) posting to ledger accounts, (4) preparing a trial balance, (5) journalizing and posting adjusting entries, (6) preparing an adjusted trial balance, (7) preparing financial statements, (8) journalizing and posting closing entries, and (9) preparing a post-closing trial balance. The purpose of the accounting cycle is to ensure all financial activities of a business are recorded and reported accurately through a series of processes that track money coming in and going out. Errors can occur if transactions are incorrectly recorded or posted, leading to an unbalanced trial balance that requires adjustment.
This document discusses the accounting standard AS 9 on revenue recognition. It provides definitions for key terms like revenue, gain, and income. Revenue is recognized when risks and rewards of ownership are transferred and the amount can be measured reliably. For services, revenue can be recognized using the percentage of completion or completed contract method. Revenue from interest, royalties, and dividends is recognized on an accrual basis. However, revenue recognition may be postponed if there is uncertainty in collection or other risks. The standard specifies different recognition criteria for domestic versus foreign revenue sources.
The document summarizes accounting concepts related to the recording process. It discusses [1] accounts and how they are used to record transactions, [2] debits and credits and how they affect account balances, and [3] the basic steps in recording transactions, including journalizing, posting to ledgers, and preparing a trial balance.
Guide to Profit and Loss, Balance Sheet & Cash flow statementsStomar
The document discusses three key financial statements:
1) The balance sheet presents the value of a company's assets and liabilities at a point in time.
2) The profit and loss (P&L) statement measures the profit generated over a period of time, though profit is an accounting opinion based on principles.
3) The cash flow statement shows cash inflows and outflows over time, including from profit, investments, and expenses.
Working capital refers to the funds required to operate a business on a day-to-day basis. It is used to acquire current assets such as inventory and accounts receivable. There are various methods to assess working capital requirements, including the operating cycle method, turnover method, and projected balance sheet method. The operating cycle method calculates needs based on the time required to complete the operating cycle from acquiring raw materials to collecting payment from customers. The turnover method, recommended by the Nayak Committee, sets the requirement at 25% of projected annual turnover. Proper validation of projections is important when using the projected balance sheet method for larger businesses.
Fa term paper sanmeet dhokay - 2015 pgpmx025Sanmeet Dhokay
This document provides an overview of key accounting concepts covered over three days:
- Day 1 discusses accounting mechanics like journals, ledgers, trial balances, and financial statements. It also covers the differences between financial and cost accounting.
- Day 2 asks questions to consider in accounting and discusses accounting approaches, transactions, trial balances, and the balance sheet.
- Day 3 covers inventory, the manufacturing process, profit calculations, depreciation methods, and cash flow statements. It also discusses ratios, returns, and feasibility analysis.
The document aims to introduce fundamental accounting topics and how they relate to recording, classifying, summarizing and interpreting business financial information.
This document discusses accounting concepts for managers, including:
1. The trading account is used to calculate gross profit by subtracting the cost of goods sold from sales. Opening and closing inventory are debited and credited, respectively, and purchases less returns are debited.
2. The profit and loss account calculates net profit by subtracting expenses from gross profit. Expenses are debited whether paid or not, and incomes are credited whether received or not.
3. Capital expenditures provide long-term benefits while revenue expenditures only benefit the current year and are debited to the profit and loss account. Trading and profit and loss accounts determine profit or loss over a period.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
The document discusses the cash flow statement, which shows a company's cash generation and cash spending over a period of time. It provides three key sections - cash flow from operating activities, investing activities, and financing activities. Cash flow from operating activities includes cash from sales and payments for expenses. Cash flow from investing activities includes cash from the sale and purchase of property, equipment and investments. Cash flow from financing activities includes cash from issuing stock or debt and paying dividends. The cash flow statement is an important financial report that shows how well a company is generating cash flow over time.
This document discusses accounting standard 9 regarding revenue recognition. It defines revenue as the gross inflow of cash or receivables from the sale of goods, rendering of services, or use of enterprise resources by others. Revenue is recognized when it is earned and realizable, following the revenue recognition and matching principles. The standard provides criteria for revenue recognition such as evidence of an arrangement, delivery, fixed pricing, and collectability. It also discusses types of revenue recognition for different transactions and the effect of uncertainties.
The document discusses cash flows from operating activities. It defines operating activities as any activities that affect a company's results, such as production and generating goods and services. It provides examples of cash inflows from operating activities, such as collecting sales, accounts receivable, and interest. Cash outflows include acquiring raw materials and paying creditors and employees. To calculate net cash flow from operating activities, non-cash expenses and changes in current assets and liabilities are added or subtracted from net income.
The document discusses financial management and management accounting. It defines financial management as measuring and reporting financial and non-financial information to help managers make decisions to fulfill organizational goals. Management accounting also measures and reports this information, but focuses on internal reporting to help managers make decisions. The document outlines the objectives, functions, key themes, and differences between financial and management accounting.
1) Cash flow estimation is necessary for capital budgeting and involves estimating initial investments, operating cash inflows, and terminal cash inflows over the project's economic life.
2) The key principles of cash flow estimation are the incremental principle, separation principle, post-tax principle, and consistency principle. Cash flows should be estimated incrementally, separated by investment and financing sides, on an after-tax basis, and consistently.
3) For expansion projects, the cash flow estimation involves calculating initial investment, operating cash flows over the project life, and terminal year non-operating cash flows from asset sale. For replacement projects, it also involves calculating the cash flows from selling the old asset.
This document discusses key concepts for making capital investment decisions using discounted cash flow analysis. It covers that incremental after-tax cash flows rather than accounting earnings should be considered. Sunk costs and opportunity costs are important factors. Side effects like cannibalism and erosion of existing products also matter. There are different approaches to estimating cash flows such as top-down or tax shield methods. Special cases like cost-cutting proposals, setting bid prices, and investments with unequal lives require additional considerations in the analysis.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
Okay, let's calculate this step-by-step:
* Salvage value of the asset = $600,000
* Book value of the asset in year 4 = $500,000
* Gain on sale of asset = Salvage value - Book value = $600,000 - $500,000 = $100,000
* Tax rate = 30%
* Tax on gain = Gain x Tax rate = $100,000 x 30% = $30,000
* After-tax salvage value = Salvage value - Tax on gain = $600,000 - $30,000 = $570,000
Therefore, the after-tax salvage value of the asset is $570,
This document discusses key considerations for evaluating capital budgeting projects, including relevant cash flows, inflation, and taxes. It emphasizes that only cash flows impacted by a project should be included in analysis and that projections should be based on real cash flows rather than accounting income. Changes to working capital like inventory and accounts receivable/payable represent relevant cash flows. Salvage values and clean-up costs also factor in. Both nominal and real cash flows can be analyzed, and taxes reduce after-tax cash flows and must be accounted for, including capital cost allowance deductions over time. All relevant after-tax cash flows should be included in methods like NPV, IRR, or profitability index to properly evaluate projects.
This document provides an overview of capital budgeting and cash flow analysis for investment projects. It defines key terms like capital expenditures, sunk costs, opportunity costs, and discusses how to estimate cash flows, including operating, terminal, and tax cash flows. It emphasizes the importance of using relevant cash flows to evaluate whether projects increase shareholder wealth.
Statement of Cash Flows The Statement of Cash Flow, the fo.docxwhitneyleman54422
Statement of Cash Flows
The Statement of Cash Flow, the fourth financial statement required by GAAP, discloses
how a corporation receives and spends cash. The module also introduces comparative
analysis, using horizontal and vertical techniques as well as standard financial ratios.
The Statement of Cash Flows
The fourth and last major financial statement for corporations is the Statement of Cash
Flows. Along with the Income Statement, Balance Sheet, and Statement of Stockholders'
Equity, the Statement of Cash Flows provides a consistent format for analyzing external
financial information across organizations.
Purpose of the Statement
As its name implies, the Statement of Cash Flows presents where a corporation received
cash (cash receipts) and where it spent cash (cash payments) during the fiscal year.
The statement has four major purposes:
• used to predict future cash flows and if bills can be paid
• used to determine if good financial investment decisions are being made by
management
• identifies if stockholder dividends can be paid to investors
• used to evaluate the relationship between changes in cash position and net income
The Statement of Cash Flows consists of three sections: operating activities, investing
activities, and financing activities. Each section or activity generates and/or uses cash.
For example:
cash is generated by:
• operating activities (receipts)
• investing activities (use of assets)
• financing activities (borrowing)
cash is used:
• operating activities (expenses to generate revenues)
• investing activities (purchase of assets)
• financing activities (repayment of long-term debt and equity payments)
Operating activities generate revenues and expenses. This source of cash is the most
important since it is derived from the main purpose of a corporation’s existence.
Investing activities deal with long-term assets. For example, the purchase of a new
machine would be an investing activity. Financing activities generate cash from
investors and creditors. If long-term debt were issued an inflow of cash would occur.
The issuance of additional stock would also generate cash while the retirement of long-
term debt would be a use of cash.
The preparation of the statement involves using the other three financial statements
(Income Statement, Balance Sheet, and Statement of Stockholders' Equity) and making
certain adjustments to shift focus from the accrual basis of accounting to the cash basis of
accounting.
The Financial Accounting Standards Board (FASB) has approved two methods of
preparing the Statement of Cash Flows: (1) the direct method, preferred by GAAP, and
(2) the indirect method, most often used by corporations.
Direct Method
The direct method provides more information and analyzes all activities that increase or
decrease cash. As with the indirect method, activities that increase or decrease cash are
first ident.
Capital budgeting focuses on cash flows rather than accounting profits. It is important to consider the timing and amounts of incremental cash inflows and outflows of a potential investment. Financing costs should be excluded from cash flow analyses. Non-cash expenses like depreciation affect cash flows through tax savings, so these tax impacts should be included. Terminal value calculations are also important to capture long-term value beyond the initial forecast period.
This document discusses various capital budgeting techniques used to evaluate investment projects, including payback period, net present value (NPV), and internal rate of return (IRR). It explains how to calculate and use each method to make accept/reject decisions for independent projects or choose between mutually exclusive projects. While NPV and IRR typically yield the same results, they may sometimes rank projects differently, posing potential conflicts. The document also covers capital rationing, risk adjustment, and required returns that vary by project risk levels.
This document discusses various capital budgeting techniques used to evaluate investment projects, including payback period, net present value (NPV), and internal rate of return (IRR). It explains how to calculate and use each method to make accept/reject decisions for independent projects or choose between mutually exclusive projects. While NPV and IRR typically yield the same results, they may sometimes rank projects differently, posing potential conflicts. The document also covers capital rationing, risk adjustment, and required returns that vary by project risk levels.
This chapter discusses tools for analyzing and evaluating project risks and outcomes, including scenario analysis, sensitivity analysis, break-even analysis, operating leverage, and capital rationing. Scenario and sensitivity analysis examine how changes in variables like revenues and costs impact a project's NPV. There are three types of break-even analysis: accounting, cash flow, and financial. Operating leverage measures how fixed costs affect changes in operating cash flow from changes in sales. Capital rationing refers to limits on available resources that require prioritizing projects based on metrics like profitability index.
The document provides an overview and definitions for key terms related to the statement of cash flows, including:
- The statement of cash flows reports sources and uses of cash divided into operating, investing, and financing activities.
- Transactions not involving cash are reported separately.
- Free cash flow is calculated as cash from operating activities less maintenance capital expenditures and dividends.
- The indirect and direct methods for preparing the operating activities section are described.
- Investing activities involve long-term assets, financing activities involve long-term liabilities and equity.
- Several examples are provided to illustrate preparing sections of the statement of cash flows.
The document discusses various capital budgeting techniques used to evaluate investment projects, including net present value (NPV), payback period, internal rate of return (IRR), and profitability index (PI). It provides definitions and explanations of each method. The key steps in a typical capital budgeting process are identified as idea generation, analyzing proposals, creating a capital budget, and monitoring decisions. The importance of using good capital budgeting techniques to increase competitiveness and shareholder wealth is highlighted. Challenges with some methods and how results can differ between IRR and NPV for certain types of projects are also covered.
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Projects may look attractive for two reasons:1) There are some errors in forecast 2)The company genuinely expects to earn excess profits.
So increase odds in your favor by moving in areas of competitive advantages.
Look at economic rents and where even advantage is absent or entry of competitors will push prices down or costs up, don’t enter .
When you have the market value of an asset use it..rather then over analysis…gold, real estate..airplanes etc…
PV calculations may vary and subject to error …that’s life!!!!!
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Madhya Pradesh, the "Heart of India," boasts a rich tapestry of culture and heritage, from ancient dynasties to modern developments. Explore its land records, historical landmarks, and vibrant traditions. From agricultural expanses to urban growth, Madhya Pradesh offers a unique blend of the ancient and modern.
University of North Carolina at Charlotte degree offer diploma Transcripttscdzuip
办理美国UNCC毕业证书制作北卡大学夏洛特分校假文凭定制Q微168899991做UNCC留信网教留服认证海牙认证改UNCC成绩单GPA做UNCC假学位证假文凭高仿毕业证GRE代考如何申请北卡罗莱纳大学夏洛特分校University of North Carolina at Charlotte degree offer diploma Transcript
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Ponzi schemes, a notorious form of financial fraud, have plagued America’s investment landscape for decades. Named after Charles Ponzi, who orchestrated one of the most infamous schemes in the early 20th century, these fraudulent operations promise high returns with little or no risk, only to collapse and leave investors with significant losses. This article explores the nature of Ponzi schemes, notable cases in American history, their impact on victims, and measures to prevent falling prey to such scams.
Understanding Ponzi Schemes
A Ponzi scheme is an investment scam where returns are paid to earlier investors using the capital from newer investors, rather than from legitimate profit earned. The scheme relies on a constant influx of new investments to continue paying the promised returns. Eventually, when the flow of new money slows down or stops, the scheme collapses, leaving the majority of investors with substantial financial losses.
Historical Context: Charles Ponzi and His Legacy
Charles Ponzi is the namesake of this deceptive practice. In the 1920s, Ponzi promised investors in Boston a 50% return within 45 days or 100% return in 90 days through arbitrage of international reply coupons. Initially, he paid returns as promised, not from profits, but from the investments of new participants. When his scheme unraveled, it resulted in losses exceeding $20 million (equivalent to about $270 million today).
Notable American Ponzi Schemes
1. Bernie Madoff: Perhaps the most notorious Ponzi scheme in recent history, Bernie Madoff’s fraud involved $65 billion. Madoff, a well-respected figure in the financial industry, promised steady, high returns through a secretive investment strategy. His scheme lasted for decades before collapsing in 2008, devastating thousands of investors, including individuals, charities, and institutional clients.
2. Allen Stanford: Through his company, Stanford Financial Group, Allen Stanford orchestrated a $7 billion Ponzi scheme, luring investors with fraudulent certificates of deposit issued by his offshore bank. Stanford promised high returns and lavish lifestyle benefits to his investors, which ultimately led to a 110-year prison sentence for the financier in 2012.
3. Tom Petters: In a scheme that lasted more than a decade, Tom Petters ran a $3.65 billion Ponzi scheme, using his company, Petters Group Worldwide. He claimed to buy and sell consumer electronics, but in reality, he used new investments to pay off old debts and fund his extravagant lifestyle. Petters was convicted in 2009 and sentenced to 50 years in prison.
4. Eric Dalius and Saivian: Eric Dalius, a prominent figure behind Saivian, a cashback program promising high returns, is under scrutiny for allegedly orchestrating a Ponzi scheme. Saivian enticed investors with promises of up to 20% cash back on everyday purchases. However, investigations suggest that the returns were paid using new investments rather than legitimate profits. The collapse of Saivian l
Every business, big or small, deals with outgoing payments. Whether it’s to suppliers for inventory, to employees for salaries, or to vendors for services rendered, keeping track of these expenses is crucial. This is where payment vouchers come in – the unsung heroes of the accounting world.
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2. Topics
1. Relevant Cash Flows For A Project
2. Cash Flows From Accounting Numbers
3. MACRS Tax Law for Depreciation
4. Sensitivity Analysis to Show Range Of NPV
(Because the Future is Unknown)
2
3. Relevant Cash Flows For A Project
• Incremental Cash Flows = difference between future cash
flows with a project & without the project.
• Any cash flow that exists regardless of whether or not a
project is undertaken in not relevant.
• Incremental Cash Flows = Aftertax Incremental Cash Flows
• Sunk Costs not relevant
• Opportunity Costs are relevant
• Side Effects/Erosion are relevant
• Change in Net Working Capital is relevant
• Financing Costs are dealt with as a managerial variable
and are not considered with the projects cash flows (Cash
Flow To/From Creditors or Stockholders.
3
4. Relevant Cash Flows
• Include only cash flows that will only
occur if the project is accepted
• Incremental cash flows
• The stand-alone principle allows us to
analyze each project in isolation from
the firm simply by focusing on
incremental cash flows
4
5. Relevant Cash Flows:
Incremental Cash Flow for a Project
Corporate cash flow with the project
Minus
Corporate cash flow without the project
5
6. Relevant Cash Flows
• “Sunk” Costs ………………………… N
• Opportunity Costs …………………... Y
• Side Effects/Erosion……..…………… Y
• Net Working Capital………………….. Y
• Financing Costs….………..…………. N
• Tax Effects ………………………..….. Y
6
7. Stand-along Principal
• The assumption that evaluation of a project
may be based on the project’s incremental
cash flows, and is evaluated separately from
other projects.
• The project has its own:
– Future revenues and costs
– Assets
– Cash flows
• Evaluate the project on its own merits.
7
8. Relevant Cash Flows For A Project
• Sunk Costs
– A cost that we have already paid or have already
incurred the liability to pay.
– Sunk costs cannot be changed as a result of accepting
or rejecting the project.
– Sunk Costs are not considered in an investment
decision.
– We already paid for the consultant on the new
product line. Isn’t that a relevant cost for the project?
No, because it is already paid for and does not change
regardless of whether we accept or reject the project.
8
9. Relevant Cash Flows For A Project
• Opportunity Costs
– Give up a benefit.
– The most valuable alternative that is given up if a
particular project is undertaken.
– If you give up a job to go to school, you must add
lost wages to the cost of the school.
– If you use land that is already paid for, to create an
organic farm, what other use for the land did you
give up?
• At minimum, an opportunity cost is what you could
have sold it for.
9
10. Relevant Cash Flows For A Project
• Erosion (Cannibalism)
–The cash flows of a new project that come
at the expense of other projects.
• Think of new product line that takes away from
sales of an existing product line.
• Cash Flow relevant only when it would not
otherwise be lost: existing product line or
competition.
10
11. Relevant Cash Flows For A Project
• NWC
– Short-term NWC (cash, inventory, AR, AP) that project
will need.
– Firm supplies NWC at beginning of project and
recovers it at end of project (like a loan).
• Financing Costs
– Interest and Dividends are not analyzed as part of the
project. They are analyzed separately.
– They are not cash flow from or to assets.
– They are cash flows from or to creditors or
stockholders (chapter 2)
11
12. Cash Flows From Accounting Numbers
• Pro Forma Financial Statements:
– Projected Financial Statements estimating the
unknown future.
• Operating Cash Flow:
OCF = EBIT + Depr – Taxes
OCF = NI + Depr if no interest expense
• Cash Flow From Assets:
CFFA = OCF – NCS –ΔNWC
NCS = Net capital spending
12
13. Tax Shield Method (Good For Cost
Savings Projects):
OCF = (Sales – VC – FC)*(1-T) + Depr*T
VC = Variable Costs (costs that increase as you sell
more)
FC = Fixed Costs (costs that do not change as you sell
more)
T = Marginal Tax Rate
13
15. Example 1: NPV calculation From Pro Forma Data
15
(Sales - Costs)*(1-T) = Cash Flow Without Depr Depr*T = Depreciation tax shield = "Non-cash expense saves on our tax bill".
*sometimes is eaiser (analyzing Cost Cutting projects)
17. Reminder of How Transactions are Recorded with
Accrual Accounting
Record Sales Transaction in Journal
Account DR CR
AR $100
Sales $100
COGS $50
Inv $50
Record Incur Expense Transaction in Journal
Expense $25
AP $25
Accrual Accounting V Cash Flow:
Revenues and Expenses Can Be
Recorded Without Cash Movement.
17
18. Example of How Accrual Accounting Must Be Un-done to get at Cash Flows
Total Sales $1,000
Total Costs = VC + FC $800
Sales - (VC + FC) $200
Balance Sheet
Beg. Balance
Balance Sheet
End. Balance
a AR $200 $220
AR went up by 20.00. This accrual
accounting must be un-done.
b Inventory $100 $90
Inventory went down by -10.00. This
accrual accounting must be un-done.
c AP $200 $180
AP went down by -20.00. This accrual
accounting must be un-done.
Net Working Capital $100 $130
Accrual Accounting Must Be Undone
to Get At Cash Flows
18
19. Undo Accrual Accounting
19
a AR Sales -$20
remove AR increase from Sales - sales were
recorded on Income Statement with no
associated cash in.
b Inventory COGS Expenses $10
add back Inventory decrease to COGS
Expenses - expenses were recorded on
Income statement with no associated cash
out.
c AP Expenses -$20
remove AP decrease from Expenses - cash
went out with no associated expense in
Income Statement.
Total Adjustment -$30
OCF 170
Adjustment to OCF $140
Total Cash Flow = OCF - NWC - Cap
Spending
Adjustment to OCF $140
20. NWC and OCF*NWC = Net Working Capital, OCF = Operating Cash Flows
• Usually there are differences between accrual
accounting sales and expenses and actual cash sales
and expenses.
• Because of this we must make adjustments to our OCF.
– Revenues may have to much or too little recorded on the
Income Statement.
• If the Accounts Receivable (AR) account (on Balance Sheet) goes up
during the year, we have non-cash revenue on the Income
Statement. We must subtract out the non-cash revenue to reflect
the true cash flow – subtract the increase in AR from OCF.
• If the AR goes down during the year, we received cash in that has no
associated revenue recorded on the Income Statement. We must
add in decrease (positive number) in AR to OCF to reflect the true
cash flow. 20
21. NWC and OCF*NWC = Net Working Capital, OCF = Operating Cash Flows
• Expenses may have to much or too little recorded on
the Income Statement.
– If the Inventory account (on Balance Sheet) goes up during
the year, we have spent more cash on inventory than we
have sold. We must subtract the increase in Inventory from
the OCF to reflect the true cash flow.
– If Inventory goes down during year, we have recorded too
much expense on Income Statement, we must add the
decrease (positive number) to OCF.
– If the Accounts Payable (AP) account (on Balance Sheet) goes
up during the year, we have non-cash expense on the Income
Statement. We must add back the non-cash expense to
reflect the true cash flow: add the increase in AP to OCF.
– If the AP goes down during the year, we have cash paid out
cash that has no associated expense on the Income
Statement. We must subtract the decrease in AP from OCF.21
22. Rule for how CA & CL affect OCF*CA = Current Assets, CL = Current Liabilities
• Increase in CA Subtract from OCF
• Decrease in CA Add to OCF
• Increase in CL Add to OCF
• Increase in CL Add to OCF
22
23. NWC and OCF
• Remember from chapter 2:
– NWC = Net Working Capital (Short term assets and
liabilities)
– CA = Current Assets
– CL = Current Liabilities
– Change NWC = End NWC – Beg NWC
– Change NWC = (End CA – End CL) – (Beg CA – Beg
CL)
23
24. Formula for Total Project Cash Flow
Total Project Cash Flow = EBIT + Depreciation – Taxes –
Change NWC – Capital Spending
OCF = EBIT + Depreciation – Taxes – (End NWC – Beg
NWC) – Capital Spending
Or
OCF = EBIT + Depreciation – Taxes – (Change in CA) +
(Change in CL) – Capital Spending
OCF = EBIT + Depreciation – Taxes – (End CA – Beg CA) +
(End CL – Beg CL) – Capital Spending 24
25. Depreciation & Cash Flow Analysis
• Because Depreciation is a non-cash expense that has
cash flow implications, we must use the IRS rules for
depreciation, Not GAAP Rules.
• Modified Accelerated Cost Recovery System (MACRS).
– We will look at somewhat simplified MACRS tables
– MACRS does not consider the life of asset or salvage value
that GAAP does.
• Calculate Depreciation to find tax cash flow
implication.
• Calculate Book Value (BV) to find tax implication for
sale of asset at end of life.
– MV (Sale Price) > BV Pay Tax (Cash Out)
– MV (Sale Price) < BV Tax Saving (Cash In)
25
26. MACRS Property Class (abbreviated)
Class (years) Example1 Example2
3-Year Research Equipment Special Tools
5-Year Autos Computers
7-Year Industrial Equipment Office Furniture
Depreciation Allowances
Class
Years 3-Year 5-Year 7-Year
1 0.3333 0.2 0.1429
2 0.4445 0.32 0.2449
3 0.1481 0.192 0.1749
4 0.0741 0.1152 0.1249
5 0.1152 0.0893
6 0.0576 0.0892
7 0.0893
8 0.0446
MACRS
26
28. Tax Effect on Sale Of Asset
Net Cash Flow from Sale Of Asset =
SP - (SP-BV)*(T)
Where:
SP = MV = Selling Price
BV = Book Value
T = Marginal tax rate
28
34. Estimates About Unknown Future
• We can only estimate what might happen in
the future.
• The actual Future Cash Flows are NOT known.
• Forecasting Risk:
– The possibility that errors in projected cash flows
will lead to incorrect decisions.
• Think of: GM buying Hummer, Warner letting AOL buy
it, B of A buying Countywide
– Sensitivity of NPV to changes in cash flow
estimates
• The more sensitive, the greater the forecasting risk
34
35. Positive NPV
• If we find positive NPV projects, we must be
skeptical.
• Finding Positive NPV projects in competitive
markets is hard to do.
35
36. If We Find Positive NPV Projects, We Should Be
Able To Point To Why:
• Is it a better product (iPod)?
• Totally new product (Wii)?
• Do we have a great marketing plan (MrExcel.com
free online videos)
• Can we manage supply and demand more
effectively (Wal-Mart)
• Do we control the market (Microsoft)
• Can we leverage the long-tail of the internet
(Amazon)?
36
37. +NPV Projects Indicate We Should Take A Closer Look.
• Scenario Analysis (Easy to do in Excel)
– Change assumptions (formula inputs) to create:
• Pessimistic case (Price & Units up, Costs down)
• Base Case
• Optimistic Case (Price & Units down, Costs up)
– Change a number of variables to gage what will
happen on the up or down side.
– This gives a range of values you can look at.
– You can run multiple scenarios:
• If cases look good, maybe the project will be good.
• If cases look bad, maybe forecast risk is high and we
should investigate further. 37
38. Problems with Scenario Analysis
• Considers only a few possible out-comes
• Assumes perfectly correlated inputs
–All “bad” values occur together and all
“good” values occur together
• Focuses on stand-alone risk, although
subjective adjustments can be made
38
39. • Sensitivity Analysis (Easy to do in Excel)
– Investigation of what happens to NPV when only one
variable is changed
– If the NPV is very sensitive to a particular variable, it
means we better take a closer look at our estimates
for that variable.
– If variable is sensitive (small change in variable means
big change in NPV – “steeper the plotted line”), then
the forecast risk associated with that variable is high.
– Line steepness can be measured by Slope (SLOPE
function in Excel)
• =SLOPE(y-values (vertical),x-values (horizontal))
+NPV Projects Indicate We Should Take A Closer Look.
39
40. Sensitivity Analysis:
• Strengths
– Provides indication of stand-alone risk.
– Identifies dangerous variables.
– Gives some breakeven information.
• Weaknesses
– Does not reflect diversification.
– Says nothing about the likelihood of change in a
variable
– Ignores relationships among variables.
40
41. Disadvantages of Sensitivity and Scenario
Analysis
• Neither provides a decision rule.
–No indication whether a project’s expected
return is sufficient to compensate for its
risk.
• Ignores diversification.
–Measures only stand-alone risk, which may
not be the most relevant risk in capital
budgeting.
41
42. Managerial Options
• So far our analysis has been static, but as projects
move forward, elements can always be changed such
as:
– Lower or raise price
– Change marketing
– Change manufacturing process
• Managerial Options (Real Options)
– Opportunities that managers can exploit if certain things
happen in the future.
– NPV will tend to be underestimated when we ignore
options.
– No reliable way to estimate $ figures for these sorts of
options.
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43. Managerial Options
• Contingency Planning
– Planning what to do if some event occurs in the future
(like sales are below break even).
• Option to expand
– If things go well (think of iPod, Wii).
• Option to abandon
– If things go badly (Think of Hummer and AOL).
• Option to wait
– Maybe after the recession would be a better time to
launch the new product.
• Strategic option
– Think: manufacturer tries their hand at retailing to see if it
is a good idea. The info gained is difficult to translate into
a $ figure in order to do DCF analysis.
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44. Capital Rationing
• Capital rationing occurs when a firm or
division has limited resources
– Soft rationing – the limited resources are
temporary, often self-imposed
– Hard rationing – capital will never be available for
this project
• The profitability index is a useful tool when
faced with soft rationing
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