Post on 05-Jan-2016
Chapter 7
Capital Investments
and
Cash Flows
2
Capital Budgeting
• Generating Ideas
• Estimate the Cash Outflows and Inflows
• Evaluate the Risks
• Select Projects
• Monitor the Accepted Projects
3
Sources of Ideas
• Committees
• R&D
• Employees
• Vendors
• Competition
4
Sources of Cash Flows
• Direct Cash Flows
• Indirect Cash Flows
• Incremental Cash Flows
• Sunk Costs
5
Measuring Cash Flows
As with Most Investment:
Cash Flows Upfront
Cash Flows Along the Way
Cash Flows at End of Project
6
NICO – Net InvestmentCash Outflow (Upfront Cash Flow)
• Asset Acquisition - Investment in Depreciable Assets
• Asset Disposition - Tax Effect on Disposition
• Changes in Net Working Capital
7
Tax Effects on Asset Disposition
Dispose of Asset for More than Book Value:
Disposition price – Tax on Gain
Dispose of Asset for Less than Book Value:
Disposition price + Tax Savings on Loss
8
Annual Cash Flow Changes(Along the Way)
ΔOCF = ΔEAT + ΔDEP
ΔOCF = (ΔREV - ΔOP EXP - ΔDEP)(1 - T) + ΔDep
Depreciation
MACRS Class Life
9
MACRS Tables
10
Disposal/Terminal Cash Flows
• Asset Disposition - Tax Effect on Disposition
• Recovery of Net Working Capital