Term
| The Capital Budgeting Process |
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Definition
1. estimate the project's after tax cash flows
build a PRO FORMA FINANCIAL STATEMENT
compute after-tax cash flows from the project
2. estimate the project risk (required rate of return)
3. Apply decision making criteria |
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Term
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Definition
only cash flows are relevant
focus on incremental cash flows
1. incremental payoffs
2. side effects
3. ignore sunk costs
4. remember working capital
5. include opportunity costs
separate investing and financing decisions
do not consider financing costs |
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Term
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Definition
| any changes in the firm's future cash flows that are a direct consequence of taking the project |
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Term
| will the cash flow only occur if we take the project? |
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Definition
yes if incremental cash flow
no if not |
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Term
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Definition
| how a project impacts the cash flows of existing assets |
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Term
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Definition
| A cost that has already been incurred and cannot be removed. Should NOT be considered in an investment decision. |
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Term
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Definition
| Necessary investment for a project in addition to long-term assets (could include cash for expenses, inventories and accounts receivable) |
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Term
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Definition
Operating Cash Flows
Changes in net working capital
Capital Spending |
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Term
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Definition
EBIT + Depreciation - Taxes
don't include interest expense when calculating cash flows, when making a decision to invest, we care about the cash flow from assets |
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Term
| Outline of Investment Decision Process |
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Definition
1. estimate the projects after tax cash flows
2. estimate project rate of return
3. apply decision making criteria |
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Term
| estimating after tax cash flows |
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Definition
1. calculate yearly OCF
2. calculate yearly change in NWC
3. calculate yearly NCS
4. total to get yearly after tax cash flows |
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Term
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Definition
DT
D= depreciation expense
T= marginal tax rate |
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Term
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Definition
identify asset class for tax purposes
multiply percentage given in table by the initial cost
depreciate to zero
mid-year convention |
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Term
| if the salvage value is different from the book value of the asset, |
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Definition
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Term
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Definition
| initial cost-total depreciation |
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Term
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Definition
| salvage - T(salvage-book value) |
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Term
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Definition
| = (Sales-Operating Costs-Depreciation)+Depreciation-(sales-operating costs-depreciation)*corporate Tax rate |
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Term
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Definition
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Term
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Definition
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Term
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Definition
OCF= (S-C-D)*(1-T)+D
net income+depreciation |
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Term
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Definition
OCF=(S-C)-(S-C-D)*T
= SALES-COSTS-TAXES |
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Term
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Definition
OCF=(S-C)*(1-T)+(D*T)
= (SALES-COST) * (1-T)+DEPRECIATION*T |
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