Submit Search
Upload
502331 capital budgeting and estimating cash flows
•
Download as PPT, PDF
•
6 likes
•
1,565 views
Zahoor Khan
Follow
capital budgeting and estimating cash flows
Read less
Read more
Education
Report
Share
Report
Share
1 of 34
Download now
Recommended
9780273713654 pp05
9780273713654 pp05
Dasrat goswami
Overview of Working Capital Management
Overview of Working Capital Management
Muhammad Yousuf Abdul Qadir
Financial Management Slides Ch 15
Financial Management Slides Ch 15
Sayyed Naveed Ali
ch.1 The role of finance management
ch.1 The role of finance management
Dasrat goswami
Financial Management Ch 06
Financial Management Ch 06
Sayyed Naveed Ali
9780273713654 pp08
9780273713654 pp08
Dasrat goswami
9780273713654 pp11
9780273713654 pp11
Dasrat goswami
Financial Management Slides Ch 14
Financial Management Slides Ch 14
Sayyed Naveed Ali
Recommended
9780273713654 pp05
9780273713654 pp05
Dasrat goswami
Overview of Working Capital Management
Overview of Working Capital Management
Muhammad Yousuf Abdul Qadir
Financial Management Slides Ch 15
Financial Management Slides Ch 15
Sayyed Naveed Ali
ch.1 The role of finance management
ch.1 The role of finance management
Dasrat goswami
Financial Management Ch 06
Financial Management Ch 06
Sayyed Naveed Ali
9780273713654 pp08
9780273713654 pp08
Dasrat goswami
9780273713654 pp11
9780273713654 pp11
Dasrat goswami
Financial Management Slides Ch 14
Financial Management Slides Ch 14
Sayyed Naveed Ali
9780273713654 pp06
9780273713654 pp06
Dasrat goswami
502331 capital budgeting techniques pp13
502331 capital budgeting techniques pp13
Naveed Hussain Shah
9780273713654 pp04
9780273713654 pp04
Dasrat goswami
Fundamentals of Financial Management.
Fundamentals of Financial Management.
IIUI
CAPITAL BUDGETING TECHNIQUES
CAPITAL BUDGETING TECHNIQUES
Khiemmy dela Torre
9780273713654 pp10
9780273713654 pp10
Dasrat goswami
Chapter 3 - Time Value of Money
Chapter 3 - Time Value of Money
umarhnasution
Risk and return
Risk and return
ISYousafzai
Financial Reporting And Analysis
Financial Reporting And Analysis
Abdullah Mir
The Business,Tex,and financial environments
The Business,Tex,and financial environments
Zubair Arshad
Risk and Returns
Risk and Returns
Mikee Bylss
Financial Management chapter-4
Financial Management chapter-4
Rakesh Singh
Chapter 1 Introduction to Financial Management
Chapter 1 Introduction to Financial Management
Safeer Raza
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
ZSMusic
risk and return
risk and return
KaleemSarwar2
Financial Management Slides Ch 16
Financial Management Slides Ch 16
Sayyed Naveed Ali
financial statement analysis
financial statement analysis
Nikesh Patra
9780273713654 pp02
9780273713654 pp02
Dasrat goswami
9780273713654 pp12
9780273713654 pp12
Dasrat goswami
Chapter 05 Time Value Of Money
Chapter 05 Time Value Of Money
Alamgir Alwani
Capital budgeting and estimating cash flows
Capital budgeting and estimating cash flows
Ian Isabel
10. cash flow in capital budgeting
10. cash flow in capital budgeting
AfiqEfendy Zaen
More Related Content
What's hot
9780273713654 pp06
9780273713654 pp06
Dasrat goswami
502331 capital budgeting techniques pp13
502331 capital budgeting techniques pp13
Naveed Hussain Shah
9780273713654 pp04
9780273713654 pp04
Dasrat goswami
Fundamentals of Financial Management.
Fundamentals of Financial Management.
IIUI
CAPITAL BUDGETING TECHNIQUES
CAPITAL BUDGETING TECHNIQUES
Khiemmy dela Torre
9780273713654 pp10
9780273713654 pp10
Dasrat goswami
Chapter 3 - Time Value of Money
Chapter 3 - Time Value of Money
umarhnasution
Risk and return
Risk and return
ISYousafzai
Financial Reporting And Analysis
Financial Reporting And Analysis
Abdullah Mir
The Business,Tex,and financial environments
The Business,Tex,and financial environments
Zubair Arshad
Risk and Returns
Risk and Returns
Mikee Bylss
Financial Management chapter-4
Financial Management chapter-4
Rakesh Singh
Chapter 1 Introduction to Financial Management
Chapter 1 Introduction to Financial Management
Safeer Raza
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
ZSMusic
risk and return
risk and return
KaleemSarwar2
Financial Management Slides Ch 16
Financial Management Slides Ch 16
Sayyed Naveed Ali
financial statement analysis
financial statement analysis
Nikesh Patra
9780273713654 pp02
9780273713654 pp02
Dasrat goswami
9780273713654 pp12
9780273713654 pp12
Dasrat goswami
Chapter 05 Time Value Of Money
Chapter 05 Time Value Of Money
Alamgir Alwani
What's hot
(20)
9780273713654 pp06
9780273713654 pp06
502331 capital budgeting techniques pp13
502331 capital budgeting techniques pp13
9780273713654 pp04
9780273713654 pp04
Fundamentals of Financial Management.
Fundamentals of Financial Management.
CAPITAL BUDGETING TECHNIQUES
CAPITAL BUDGETING TECHNIQUES
9780273713654 pp10
9780273713654 pp10
Chapter 3 - Time Value of Money
Chapter 3 - Time Value of Money
Risk and return
Risk and return
Financial Reporting And Analysis
Financial Reporting And Analysis
The Business,Tex,and financial environments
The Business,Tex,and financial environments
Risk and Returns
Risk and Returns
Financial Management chapter-4
Financial Management chapter-4
Chapter 1 Introduction to Financial Management
Chapter 1 Introduction to Financial Management
Van Horn Chapter 2.ppt
Van Horn Chapter 2.ppt
risk and return
risk and return
Financial Management Slides Ch 16
Financial Management Slides Ch 16
financial statement analysis
financial statement analysis
9780273713654 pp02
9780273713654 pp02
9780273713654 pp12
9780273713654 pp12
Chapter 05 Time Value Of Money
Chapter 05 Time Value Of Money
Viewers also liked
Capital budgeting and estimating cash flows
Capital budgeting and estimating cash flows
Ian Isabel
10. cash flow in capital budgeting
10. cash flow in capital budgeting
AfiqEfendy Zaen
Estimation of Cash Flow
Estimation of Cash Flow
Venkatakrishnan Narayanan
Chapter 10 Cash Flow Estimation
Chapter 10 Cash Flow Estimation
Alamgir Alwani
Capital budgeting cash flow estimation
Capital budgeting cash flow estimation
Prafulla Tekriwal
Capital Budgeting
Capital Budgeting
Dayasagar S
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL MANAGEMENT
ipermeeta
Viewers also liked
(7)
Capital budgeting and estimating cash flows
Capital budgeting and estimating cash flows
10. cash flow in capital budgeting
10. cash flow in capital budgeting
Estimation of Cash Flow
Estimation of Cash Flow
Chapter 10 Cash Flow Estimation
Chapter 10 Cash Flow Estimation
Capital budgeting cash flow estimation
Capital budgeting cash flow estimation
Capital Budgeting
Capital Budgeting
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL MANAGEMENT
Similar to 502331 capital budgeting and estimating cash flows
Financial Management-Ch-12-Capital Budgeting.pptx
Financial Management-Ch-12-Capital Budgeting.pptx
auditomyreriyasakti1
Chap 6.ppt
Chap 6.ppt
ssusera305da
Lecturer 5 Working Capital.ppt
Lecturer 5 Working Capital.ppt
kennedy785289
Returns on cash of capital
Returns on cash of capital
Mvs Krishna
9780273713654 pp09
9780273713654 pp09
Dasrat goswami
Estructura de capital
Estructura de capital
Roberto Quintanilla
Presentation Final
Presentation Final
-
Chapter04_Capital_Budgeting.pptx
Chapter04_Capital_Budgeting.pptx
Jahirul Islam Shovon
PM Unit III - Project Cash Flows
PM Unit III - Project Cash Flows
Ghaith Al Darmaki
pp02.ppt
pp02.ppt
AhmadAlzoabi
Ch 02 PPT
Ch 02 PPT
ssuser1544b3
DETERMING CASH FLOWS FOR INVESTING ANALYSIS
DETERMING CASH FLOWS FOR INVESTING ANALYSIS
PANKAJ PANDEY
L1 flash cards corporate finance (ss11)
L1 flash cards corporate finance (ss11)
analystbuddy
Cfd ppt
Cfd ppt
himanshujaiswal
Investment decision
Investment decision
himanshujaiswal
Chapter 11 Capital Budgeting” from Finance by Boundless is us.docx
Chapter 11 Capital Budgeting” from Finance by Boundless is us.docx
bartholomeocoombs
Brad Simon - Finance Lecture - Project Valuation
Brad Simon - Finance Lecture - Project Valuation
bradhapa
Project Valuation Lecture
Project Valuation Lecture
bradhapa
VBM, KPI Feb 2016
VBM, KPI Feb 2016
Olegas Kasatkinas
lecture 9.ppt
lecture 9.ppt
baseerullah3
Similar to 502331 capital budgeting and estimating cash flows
(20)
Financial Management-Ch-12-Capital Budgeting.pptx
Financial Management-Ch-12-Capital Budgeting.pptx
Chap 6.ppt
Chap 6.ppt
Lecturer 5 Working Capital.ppt
Lecturer 5 Working Capital.ppt
Returns on cash of capital
Returns on cash of capital
9780273713654 pp09
9780273713654 pp09
Estructura de capital
Estructura de capital
Presentation Final
Presentation Final
Chapter04_Capital_Budgeting.pptx
Chapter04_Capital_Budgeting.pptx
PM Unit III - Project Cash Flows
PM Unit III - Project Cash Flows
pp02.ppt
pp02.ppt
Ch 02 PPT
Ch 02 PPT
DETERMING CASH FLOWS FOR INVESTING ANALYSIS
DETERMING CASH FLOWS FOR INVESTING ANALYSIS
L1 flash cards corporate finance (ss11)
L1 flash cards corporate finance (ss11)
Cfd ppt
Cfd ppt
Investment decision
Investment decision
Chapter 11 Capital Budgeting” from Finance by Boundless is us.docx
Chapter 11 Capital Budgeting” from Finance by Boundless is us.docx
Brad Simon - Finance Lecture - Project Valuation
Brad Simon - Finance Lecture - Project Valuation
Project Valuation Lecture
Project Valuation Lecture
VBM, KPI Feb 2016
VBM, KPI Feb 2016
lecture 9.ppt
lecture 9.ppt
Recently uploaded
Types of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptx
Eyham Joco
Capitol Tech U Doctoral Presentation - April 2024.pptx
Capitol Tech U Doctoral Presentation - April 2024.pptx
CapitolTechU
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptx
thorishapillay1
Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)
eniolaolutunde
Pharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdf
Mahmoud M. Sallam
Introduction to ArtificiaI Intelligence in Higher Education
Introduction to ArtificiaI Intelligence in Higher Education
pboyjonauth
Hierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of management
mkooblal
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
iammrhaywood
Full Stack Web Development Course for Beginners
Full Stack Web Development Course for Beginners
Sabitha Banu
KSHARA STURA .pptx---KSHARA KARMA THERAPY (CAUSTIC THERAPY)————IMP.OF KSHARA ...
KSHARA STURA .pptx---KSHARA KARMA THERAPY (CAUSTIC THERAPY)————IMP.OF KSHARA ...
M56BOOKSTORE PRODUCT/SERVICE
OS-operating systems- ch04 (Threads) ...
OS-operating systems- ch04 (Threads) ...
Dr. Mazin Mohamed alkathiri
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
iammrhaywood
Crayon Activity Handout For the Crayon A
Crayon Activity Handout For the Crayon A
UnboundStockton
MARGINALIZATION (Different learners in Marginalized Group
MARGINALIZATION (Different learners in Marginalized Group
JonathanParaisoCruz
Presiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha elections
anshu789521
Earth Day Presentation wow hello nice great
Earth Day Presentation wow hello nice great
YousafMalik24
TataKelola dan KamSiber Kecerdasan Buatan v022.pdf
TataKelola dan KamSiber Kecerdasan Buatan v022.pdf
Sarwono Sutikno, Dr.Eng.,CISA,CISSP,CISM,CSX-F
Employee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptx
NirmalaLoungPoorunde1
CARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptx
GaneshChakor2
internship ppt on smartinternz platform as salesforce developer
internship ppt on smartinternz platform as salesforce developer
unnathinaik
Recently uploaded
(20)
Types of Journalistic Writing Grade 8.pptx
Types of Journalistic Writing Grade 8.pptx
Capitol Tech U Doctoral Presentation - April 2024.pptx
Capitol Tech U Doctoral Presentation - April 2024.pptx
Proudly South Africa powerpoint Thorisha.pptx
Proudly South Africa powerpoint Thorisha.pptx
Software Engineering Methodologies (overview)
Software Engineering Methodologies (overview)
Pharmacognosy Flower 3. Compositae 2023.pdf
Pharmacognosy Flower 3. Compositae 2023.pdf
Introduction to ArtificiaI Intelligence in Higher Education
Introduction to ArtificiaI Intelligence in Higher Education
Hierarchy of management that covers different levels of management
Hierarchy of management that covers different levels of management
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
ECONOMIC CONTEXT - PAPER 1 Q3: NEWSPAPERS.pptx
Full Stack Web Development Course for Beginners
Full Stack Web Development Course for Beginners
KSHARA STURA .pptx---KSHARA KARMA THERAPY (CAUSTIC THERAPY)————IMP.OF KSHARA ...
KSHARA STURA .pptx---KSHARA KARMA THERAPY (CAUSTIC THERAPY)————IMP.OF KSHARA ...
OS-operating systems- ch04 (Threads) ...
OS-operating systems- ch04 (Threads) ...
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
ECONOMIC CONTEXT - LONG FORM TV DRAMA - PPT
Crayon Activity Handout For the Crayon A
Crayon Activity Handout For the Crayon A
MARGINALIZATION (Different learners in Marginalized Group
MARGINALIZATION (Different learners in Marginalized Group
Presiding Officer Training module 2024 lok sabha elections
Presiding Officer Training module 2024 lok sabha elections
Earth Day Presentation wow hello nice great
Earth Day Presentation wow hello nice great
TataKelola dan KamSiber Kecerdasan Buatan v022.pdf
TataKelola dan KamSiber Kecerdasan Buatan v022.pdf
Employee wellbeing at the workplace.pptx
Employee wellbeing at the workplace.pptx
CARE OF CHILD IN INCUBATOR..........pptx
CARE OF CHILD IN INCUBATOR..........pptx
internship ppt on smartinternz platform as salesforce developer
internship ppt on smartinternz platform as salesforce developer
502331 capital budgeting and estimating cash flows
1.
12.1 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Chapter 12Chapter 12 Capital BudgetingCapital Budgeting and Estimatingand Estimating Cash FlowsCash Flows
2.
12.2 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. After Studying Chapter 12,After Studying Chapter 12, you should be able to:you should be able to: 1. Define capital budgeting and identify the steps involved in the capital budgeting process. 2. Explain the procedure to generate long-term project proposals within the firm. 3. Justify why cash, not income, flows are the most relevant to capital budgeting decisions. 4. Summarize in a “checklist” the major concerns to keep in mind as one prepares to determine relevant capital budgeting cash flows. 5. Define the terms “sunk cost” and “opportunity cost” and explain why sunk costs must be ignored, while opportunity costs must be included, in capital budgeting analysis. 6. Explain how tax considerations, as well as depreciation for tax purposes, affects capital budgeting cash flows. 7. Determine initial, interim, and terminal period “after-tax, incremental, operating cash flows” associated with a capital investment project.
3.
12.3 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Capital Budgeting andCapital Budgeting and Estimating Cash FlowsEstimating Cash Flows • The Capital Budgeting Process • Generating Investment Project Proposals • Estimating Project “After-Tax Incremental Operating Cash Flows”
4.
12.4 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. What isWhat is Capital Budgeting?Capital Budgeting? The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.
5.
12.5 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. The CapitalThe Capital Budgeting ProcessBudgeting Process • Generate investment proposals consistent with the firm’s strategic objectives. • Estimate after-tax incremental operating cash flows for the investment projects. • Evaluate project incremental cash flows.
6.
12.6 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. The CapitalThe Capital Budgeting ProcessBudgeting Process • Select projects based on a value- maximizing acceptance criterion. • Reevaluate implemented investment projects continually and perform postaudits for completed projects.
7.
12.7 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Classification of InvestmentClassification of Investment Project ProposalsProject Proposals 1. New products or expansion of existing products 2. Replacement of existing equipment or buildings 3. Research and development 4. Exploration 5. Other (e.g., safety or pollution related)
8.
12.8 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Screening ProposalsScreening Proposals and Decision Makingand Decision Making 1. Section Chiefs 2. Plant Managers 3. VP for Operations 4. Capital Expenditures Committee 5. President 6. Board of Directors AdvancementAdvancement to the nextto the next level dependslevel depends on coston cost and strategicand strategic importance.importance.
9.
12.9 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Estimating After-TaxEstimating After-Tax Incremental Cash FlowsIncremental Cash Flows • CashCash (not accounting income) flowsflows • OperatingOperating (not financing) flowsflows • After-tax flowsAfter-tax flows • Incremental flowsIncremental flows Basic characteristics ofBasic characteristics of relevant project flowsrelevant project flows
10.
12.10 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Estimating After-TaxEstimating After-Tax Incremental Cash FlowsIncremental Cash Flows • Ignore sunk costssunk costs • Include opportunity costsopportunity costs • Include project-driven changes inchanges in working capitalworking capital net of spontaneous changes in current liabilities • Include effects of inflationeffects of inflation Principles that must be adheredPrinciples that must be adhered to in the estimationto in the estimation
11.
12.11 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Tax ConsiderationsTax Considerations and Depreciationand Depreciation • Generally, profitable firms prefer to use an accelerated method for tax reporting purposes (MACRS). • DepreciationDepreciation represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
12.
12.12 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Depreciation and theDepreciation and the MACRS MethodMACRS Method • Everything else equal, the greater the depreciation charges, the lower the taxes paid by the firm. • Depreciation is a noncash expense. • Assets are depreciated (MACRS) on one of eight different property classes. • Generally, the half-year convention is used for MACRS.
13.
12.13 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. MACRS Sample ScheduleMACRS Sample Schedule Recovery Property Class Year 3-Year 5-Year 7-Year 1 33.33% 20.00% 14.29% 2 44.45 32.00 24.49 3 14.81 19.20 17.49 4 7.41 11.52 12.49 5 11.52 8.93 6 5.76 8.92 7 8.93 8 4.46
14.
12.14 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Depreciable BasisDepreciable Basis In tax accounting, the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes. Depreciable BasisDepreciable Basis = Cost of AssetCost of Asset + CapitalizedCapitalized ExpendituresExpenditures
15.
12.15 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. CapitalizedCapitalized ExpendituresExpenditures Capitalized ExpendituresCapitalized Expenditures are expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred. Examples: Shipping and installation
16.
12.16 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Sale or Disposal ofSale or Disposal of a Depreciable Asseta Depreciable Asset • Often historically, capital gains income has received more favorable US tax treatment than operating income. • Generally, the sale of a “capital asset” (as defined by the IRS) generates a capital gain (asset sells for more than book value) or capital loss (asset sells for less than book value).
17.
12.17 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Corporate CapitalCorporate Capital Gains / LossesGains / Losses • Capital losses are deductible only against capital gains. • Currently, capital gains are taxed at ordinary income tax rates for corporations, or a maximum 35%.
18.
12.18 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Calculating theCalculating the Incremental Cash FlowsIncremental Cash Flows • Initial cash outflowInitial cash outflow – the initial net cash investment. • Interim incremental net cash flowsInterim incremental net cash flows – those net cash flows occurring after the initial cash investment but not including the final period’s cash flow. • Terminal-year incremental net cashTerminal-year incremental net cash flowsflows – the final period’s net cash flow.
19.
12.19 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Initial Cash OutflowInitial Cash Outflow a) Cost of “new” assetsCost of “new” assets b) + Capitalized expenditures c) + (–) Increased (decreased) NWC d) – Net proceeds from sale of “old” asset(s) if replacement e) + (–) Taxes (savings) due to the sale of “old” asset(s) if replacement f) == Initial cashInitial cash outflowoutflow
20.
12.20 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Incremental Cash FlowsIncremental Cash Flows a) Net incr. (decr.) in operating revenue less (plus) any net incr. (decr.) in operating expenses, excluding depr. b) – (+) Net incr. (decr.) in tax depreciation c) = Net change in income before taxes d) – (+) Net incr. (decr.) in taxes e) = Net change in income after taxes f) + (–) Net incr. (decr.) in tax depr. charges g) == Incremental net cash flow for periodIncremental net cash flow for period
21.
12.21 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Terminal-YearTerminal-Year Incremental Cash FlowsIncremental Cash Flows a) Calculate the incremental net cashincremental net cash flowflow for the terminal periodterminal period b) + (–) Salvage value (disposal/reclamation costs) of any sold or disposed assets c) – (+) Taxes (tax savings) due to asset sale or disposal of “new” assets d) + (–) Decreased (increased) level of “net” working capital e) == Terminal year incremental net cash flowTerminal year incremental net cash flow
22.
12.22 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Example of an AssetExample of an Asset Expansion ProjectExpansion Project Basket Wonders (BW) is considering the purchase of a new basket weaving machine. The machine will cost $50,000 plus $20,000 for shipping and installation and falls under the 3- year MACRS class. NWC will rise by $5,000. Lisa Miller forecasts that revenues will increase by $110,000 for each of the next 4 years and will then be sold (scrapped) for $10,000 at the end of the fourth year, when the project ends. Operating costs will rise by $70,000 for each of the next four years. BW is in the 40% tax bracket.
23.
12.23 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Initial Cash OutflowInitial Cash Outflow a) $50,000 b) + 20,000 c) + 5,000 d) – 0 (not a replacement) e) + (–) 0 (not a replacement) f) == $75,000*$75,000* * Note that we have calculated this value as a “positive” because it is a cash OUTFLOW (negative).
24.
12.24 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Incremental Cash FlowsIncremental Cash Flows Year 1 Year 2 Year 3 Year 4 a) $40,000 $40,000 $40,000 $40,000 b) – 23,331 31,115 10,367 5,187 c) = $16,669 $ 8,885 $29,633 $34,813 d) – 6,668 3,554 11,853 13,925 e) = $10,001 $ 5,331 $17,780 $20,888 f) + 23,331 31,115 10,367 5,187 g) == $33,332 $36,446 $28,147 $26,075$33,332 $36,446 $28,147 $26,075
25.
12.25 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Terminal-YearTerminal-Year Incremental Cash FlowsIncremental Cash Flows a) $26,075$26,075 The incremental cash flowincremental cash flow from the previous slide in Year 4. b) + 10,000 Salvage Value. c) – 4,000 .40*($10,000 - 0) Note, the asset is fully depreciated at the end of Year 4. d) + 5,000 NWC - Project ends. e) == $37,075$37,075 Terminal-year incrementalTerminal-year incremental cash flow.cash flow.
26.
12.26 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Summary of ProjectSummary of Project Net Cash FlowsNet Cash Flows Asset Expansion Year 0 Year 1 Year 2 Year 3 Year 4 ––$75,000*$75,000* $33,332$33,332 $36,446 $28,147$36,446 $28,147 $37,075$37,075 * Notice again that this value is a negativenegative cash flow as we calculated it as the initial cash OUTFLOW in slide 12-23.
27.
12.27 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. RememberRemember, you can use, you can use Excel - Very Valuable!!Excel - Very Valuable!! Refer to the spreadsheet ‘VW13E- 12b.xlsx’ on the ‘New Asset’ tab for this spreadsheet. Try changingTry changing information ininformation in thethe spreadsheetspreadsheet to see theto see the impact!impact! New Asset Cost: 50,000$ Old Asset current market value: -$ Capitalized Expenditures: 20,000$ Old' Asset current book value: -$ Initial Net Working Capital: 5,000$ 1 2 3 4 Remaining Depreciation at end of period 4 23,331$ 31,115$ 10,367$ 5,187$ -$ -$ -$ -$ -$ 23,331$ 31,115$ 10,367$ 5,187$ ICO New Asset Cost: 50,000$ Capitalized Expenditures: 20,000$ Initial Net Working Capital: 5,000$ Proceeds from sale of 'old' assets: -$ No need on a NEW asset, so $0 value Tax on proceeds relative to book value: -$ No need on a NEW asset, so $0 value 75,000$ Δ in oper revenue: 110,000$ Δ in oper expense: 70,000$ Tax rate: 40% 0 1 2 3 4 Δ in oper revenue - Δ in oper expense: 40,000$ 40,000$ 40,000$ 40,000$ subtract Δ in depreciation: 23,331$ 31,115$ 10,367$ 5,187$ 0 (75,000)$ equals Δ in income before taxes: 16,669$ 8,885$ 29,633$ 34,813$ 1 33,332$ subtract Δ in taxes: 6,668$ 3,554$ 11,853$ 13,925$ 2 36,446$ equals Δ in income after taxes: 10,001$ 5,331$ 17,780$ 20,888$ 3 28,147$ add back non-cash Δ in depreciation: 23,331$ 31,115$ 10,367$ 5,187$ 4 37,075$ Incremental cash flow: 33,332$ 36,446$ 28,147$ 26,075$ 0 1 2 3 4 Incremental cash flow: 26,075$ add positive salvage value: 10,000$ subtract incr in tax liability: 4,000$ subtract Δ in net working capital: 5,000$ equals Δ in income after taxes: 37,075$ Year: Initial Cash Outflow: Interim Cash Flows: Terminal Year Cash Flow Adjustments: Year Cash Flow Depreciation Schedule for "New" asset: Depreciation Schedule for "Old" asset: Additional (marginal) depreciation on project:
28.
12.28 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Example of an AssetExample of an Asset Replacement ProjectReplacement Project Let us assume that previous asset expansion project is actually an asset replacement project. The original basis of the machine was $30,000 and depreciated using straight-line over five years ($6,000 per year). The machine has two years of depreciation and four years of useful life remain- ing. BW can sell the current machine for $6,000. The new machine will not increase revenues (remain at $110,000) but it decreases operating expenses by $10,000 per year (old = $80,000). NWC will rise to $10,000 from $5,000 (old).
29.
12.29 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Initial Cash OutflowInitial Cash Outflow a) $50,000 b) + 20,000 c) + 5,000 d) – 6,000 (sale of “old” asset) e) – 2,400 <---- f) == $66,600$66,600 (tax savings from loss on sale of “old” asset)
30.
12.30 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Calculation of theCalculation of the Change in DepreciationChange in Depreciation Year 1 Year 2 Year 3 Year 4 a) $23,331 $31,115 $10,367 $ 5,187 b) – 6,000 6,000 0 0 c) = $17,331 $25,115 $10,367 $ 5,187$17,331 $25,115 $10,367 $ 5,187 a) Represent the depreciation on the “new” project. b) Represent the remaining depreciation on the “old” project. c) Net changechange in tax depreciation charges.
31.
12.31 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Incremental Cash FlowsIncremental Cash Flows Year 1 Year 2 Year 3 Year 4 a) $10,000 $10,000 $10,000 $10,000 b) – 17,331 25,115 10,367 5,18717,331 25,115 10,367 5,187 c) = $ –7,331 –$15,115 $ –367 $ 4,813 d) – –2,932 –6,046 –147 1,925 e) = $ –4,399 $ –9,069 $ –220 $ 2,888 f) + 17,33117,331 25,11525,115 10,367 5,18710,367 5,187 g) == $12,932 $16,046 $10,147 $ 8,075$12,932 $16,046 $10,147 $ 8,075
32.
12.32 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Terminal-YearTerminal-Year Incremental Cash FlowsIncremental Cash Flows a) $ 8,075$ 8,075 The incremental cash flowincremental cash flow from the previous slide in Year 4. b) + 10,000 Salvage Value. c) – 4,000 (.40)*($10,000 – 0). Note, the asset is fully depreciated at the end of Year 4. d) + 5,000 Return of “added” NWC. e) == $19,075$19,075 Terminal-year incrementalTerminal-year incremental cash flow.cash flow.
33.
12.33 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. RememberRemember, you can use, you can use Excel - Very Valuable!!Excel - Very Valuable!! Refer to the spreadsheet ‘VW13E- 12b.xlsx’ on the ‘Asset Replacement’ tab for this spreadsheet. Try changingTry changing information ininformation in thethe spreadsheetspreadsheet to see theto see the impact!impact! New Asset Cost: 50,000$ Old Asset current market value: 6,000$ Capitalized Expenditures: 20,000$ Old' Asset current book value: 12,000$ Initial Net Working Capital: 5,000$ 1 2 3 4 Remaining Depreciation at end of period 4 23,331$ 31,115$ 10,367$ 5,187$ -$ 6,000$ 6,000$ -$ -$ 17,331$ 25,115$ 10,367$ 5,187$ ICO New Asset Cost: 50,000$ Capitalized Expenditures: 20,000$ Initial Net Working Capital: 5,000$ Proceeds from sale of 'old' assets: 6,000$ No need on a NEW asset, so $0 value Tax on proceeds relative to book value: (2,400)$ No need on a NEW asset, so $0 value 66,600$ Δ in oper revenue: -$ <== both are at $110,000 Δ in oper expense: (10,000)$ <== oper expenses reduced from $80K to $70K Tax rate: 40% 0 1 2 3 4 Δ in oper revenue - Δ in oper expense: 10,000$ 10,000$ 10,000$ 10,000$ subtract Δ in depreciation: 17,331$ 25,115$ 10,367$ 5,187$ 0 (66,600)$ equals Δ in income before taxes: (7,331)$ (15,115)$ (367)$ 4,813$ 1 12,932$ subtract Δ in taxes: (2,932)$ (6,046)$ (147)$ 1,925$ 2 16,046$ equals Δ in income after taxes: (4,399)$ (9,069)$ (220)$ 2,888$ 3 10,147$ add back non-cash Δ in depreciation: 17,331$ 25,115$ 10,367$ 5,187$ 4 19,075$ Incremental cash flow: 12,932$ 16,046$ 10,147$ 8,075$ 0 1 2 3 4 Incremental cash flow: 8,075$ add positive salvage value: 10,000$ subtract incr in tax liability: 4,000$ subtract Δ in net working capital: 5,000$ equals Δ in income after taxes: 19,075$ Terminal Year Cash Flow Adjustments: Cash FlowYear Year: Depreciation Schedule for "New" asset: Depreciation Schedule for "Old" asset: Additional (marginal) depreciation on project: Initial Cash Outflow: Interim Cash Flows:
34.
12.34 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Summary of ProjectSummary of Project Net Cash FlowsNet Cash Flows Asset Expansion Year 0 Year 1 Year 2 Year 3 Year 4 ––$75,000$75,000 $33,332$33,332 $36,446 $28,147$36,446 $28,147 $37,075$37,075 Asset Replacement Year 0 Year 1 Year 2 Year 3 Year 4 ––$66,600$66,600 $12,933$12,933 $16,046 $10,147$16,046 $10,147 $19,075$19,075
Download now