The topic discussed in this chapter is making capital investment decisions. In this chapter, you will learn: Understand how to determine the relevant cash flows for a proposed investment, understand how to analyse a project’s projected cash flows, understand how to evaluate an estimated NPV. | 9- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 9- Key Concepts and Skills Understand how to: Determine the relevant cash flows for a proposed investment Analyze a project’s projected cash flows Evaluate an estimated NPV 9. 9- Chapter Outline Project Cash Flows: A First Look Incremental Cash Flows Pro Forma Financial Statements and Project Cash Flows More on Project Cash Flows Evaluating NPV Estimates Scenario and Other What-If Analyses Additional Considerations in Capital Budgeting 9. 9- 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 9- Relevant Cash Flows: Incremental Cash Flow for a Project Corporate cash flow with the project Minus Corporate cash flow without the project 9- . | 9- Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 9- Key Concepts and Skills Understand how to: Determine the relevant cash flows for a proposed investment Analyze a project’s projected cash flows Evaluate an estimated NPV 9. 9- Chapter Outline Project Cash Flows: A First Look Incremental Cash Flows Pro Forma Financial Statements and Project Cash Flows More on Project Cash Flows Evaluating NPV Estimates Scenario and Other What-If Analyses Additional Considerations in Capital Budgeting 9. 9- 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 9- Relevant Cash Flows: Incremental Cash Flow for a Project Corporate cash flow with the project Minus Corporate cash flow without the project 9- Relevant Cash Flows “Sunk” Costs N Opportunity Costs . Y Side Effects/Erosion Y Net Working Capital Y Financing Costs . . N Tax Effects Y 9- Pro Forma Statements and Cash Flow Pro Forma Financial Statements Projects future operations 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 9. Operating cash flow – students often have to go back to the income statement to see that the two definitions of operating cash flow are equivalent when there is no interest expense. 9- Shark Attractant Project Estimated sales 50,000 cans Sales Price per can $ Cost per can $ Estimated life 3 years Fixed costs $12,000/year Initial equipment cost $90,000 100% depreciated over 3 year life Investment in NWC $20,000 Tax rate 34% Cost of capital 20% 9- Pro Forma Income Statement Table Sales (50,000 units at $) .
