1) The document discusses key concepts for capital investment decisions including determining relevant cash flows, computing depreciation, and methods for calculating operating cash flow. 2) It emphasizes that only incremental cash flows from accepting a project should be included in the analysis. Common types of cash flows are discussed. 3) Pro forma financial statements and tables are presented to illustrate how to project cash flows, capital requirements, and total cash flows for making the investment decision.

1. Making Capital Investment Decisions

8. Table 2.1 Pro Forma Income Statement $ 21,780 Net Income 11,220 Taxes (34%) $ 33,000 EBIT 30,000 Depreciation ($90,000 / 3) 12,000 Fixed costs $ 75,000 Gross profit 125,000 Variable Costs ($2.50/unit) $200,000 Sales (50,000 units at $4.00/unit)

9. Table 2.2 Projected Capital Requirements $20,000 $50,000 $80,000 $110,000 Total 0 30,000 60,000 90,000 NFA $20,000 $20,000 $20,000 $20,000 NWC 3 2 1 0 Year

10. Table 2.3 Projected Total Cash Flows $71,780 $51,780 $51,780 -$110,00 CFFA -$90,000 NCS 20,000 -$20,000 Change in NWC $51,780 $51,780 $51,780 OCF 3 2 1 0 Year

18. Example: Three-year MACRS BV in year 6 = 110,000 – 36,663 – 48,884 – 16,302 – 8,151 = 0 After-tax salvage = 17,000 - .4(17,000 – 0) = $10,200 .0741(110,000) = 8,151 .0741 4 .1482(110,000) = 16,302 .1482 3 .4444(110,000) = 48,884 .4444 2 .3333(110,000) = 36,663 .3333 1 D MACRS percent Year

19. Example: 7-Year MACRS BV in year 6 = 110,000 – 15,719 – 26,939 – 19,239 – 13,739 – 9,823 – 9,823 = 14,718 After-tax salvage = 17,000 - .4(17,000 – 14,718) = 16,087.20 .0893(110,000) = 9,823 .0893 6 .0893(110,000) = 9,823 .0893 5 .1249(110,000) = 13,739 .1249 4 .1749(110,000) = 19,239 .1749 3 .2449(110,000) = 26,939 .2449 2 .1429(110,000) = 15,719 .1429 1 D MACRS Percent Year

22. Replacement Problem – Pro Forma Income Statements 35,400 29,100 21,900 (5,100) 5,700 NI 23,600 19,400 14,600 (3,400) 3,800 Taxes 59,000 48,500 36,500 (8,500) 9,500 EBIT (9,000) 1,500 13,500 58,500 40,500 Increm. 9,000 9,000 9,000 9,000 9,000 Old 0 10,500 22,500 67,500 49,500 New Depr. 50,000 50,000 50,000 50,000 50,000 Cost Savings 5 4 3 2 1 Year

24. Replacement Problem – Cash Flow From Assets 16,400 30,600 35,400 53,400 46,200 -89,000 CFFA 0 0  In NWC -10,000 -89,000 NCS 26,400 30,600 35,400 53,400 46,200 OCF 5 4 3 2 1 0 Year