公司理财教学资料cha课件.ppt

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1、Chapter 10Making Capital Investment Decisions,2023/5/31,Chapter Outline,Project Cash Flows:A First LookIncremental Cash FlowsPro Forma Financial Statements and Project Cash FlowsMore about Project Cash FlowAlternative Definitions of Operating Cash FlowSome Special Cases of Discounted Cash Flow Analy

2、sis,10-2,2023/5/31,Relevant Cash Flows,The cash flows that should be included in a capital budgeting analysis are those that will only occur(or not occur)if the project is acceptedThese cash flows are called incremental cash flowsThe stand-alone principle-analyze each project in isolation from the f

3、irm(on its own merits)by focusing on incremental cash flows,10-3,2023/5/31,Asking the Right Question,You should always ask yourself“Will this cash flow occur ONLY if we accept the project?”If the answer is“yes,”it should be included in the analysis because it is incrementalIf the answer is“part of i

4、t,”then we should include the part that occurs because of the projectIf the answer is“no,”it should not be included in the analysis because it will occur anyway,10-4,2023/5/31,Common Types of Cash Flows,Sunk costs costs that have accrued in the pastOpportunity costs costs of lost optionsSide effects

5、Positive side effects benefits to other projectsNegative side effects costs to other projectsChanges in net working capitalTaxes(use after-tax cash flows)Do not consider Financing Costs(part of R),10-5,2023/5/31,Pro Forma Statements and Cash Flow,Capital budgeting relies heavily on pro forma account

6、ing statements,particularly income statementsComputing cash flows:Operating Cash Flow(OCF)=EBIT+depreciation taxesOCF=Net income+depreciation(when there is no interest expense)Cash Flow From Assets(CFFA)=OCF net capital spending(NCS)changes in NWC,10-6,2023/5/31,Table 10.1(p.310)Pro Forma Income Sta

7、tement,10-7,2023/5/31,Table 10.2 Projected Capital Requirements(balance sheet),10-8,2023/5/31,2023/5/31,Capital spending at the time of project inception(i.e.,the“initial outlay”)includes the following items:+purchase price of the new asset-selling price of the asset replaced(if applicable)+costs of

8、 site preparation,setup,and startup+/-increase(decrease)in tax liability due to sale of old asset at other than book value=net capital spending,Table 10.5(p.311)Projected Total Cash Flows,10-10,2023/5/31,Making The Decision,Now that we have the cash flows,we can apply the techniques that we learned

9、in Chapter 9Use formulas for PV of discounted cash flowsShould we accept or reject the project?,10-11,2023/5/31,More on NWC,Why do we have to consider changes in NWC separately?GAAP requires that sales be recorded on the income statement when made,not when cash is receivedGAAP also requires that we

10、record cost of goods sold when the corresponding sales are made,whether we have actually paid our suppliers yetFinally,we have to buy inventory to support sales,although we havent collected cash yet,10-12,2023/5/31,Depreciation,The depreciation expense used for capital budgeting should be the deprec

11、iation schedule required by the IRS for tax purposesDepreciation itself is a non-cash expense;consequently,it is only relevant because it affects taxesDepreciation tax shield=DTD=depreciation expenseT=marginal tax rate,10-13,2023/5/31,Computing Depreciation,Straight-line DepreciationD=(Initial cost

12、salvage)/number of yearsVery few assets are depreciated straight-line for tax purposesMACRS(Modified Accelerated Cost Recovery System)p.316Need to know which asset class is appropriate for tax purposesMultiply percentage given in table by the initial costDepreciate to zeroMid-year convention,10-14,2

13、023/5/31,After-tax Salvage,After-tax salvage is the capital recovery cash flow at project end.If the salvage value is different from the book value of the asset,then there is a tax effectBook value=initial cost accumulated depreciationAfter-tax salvage=salvage Tax*(salvage book value),10-15,2023/5/3

14、1,Example:Depreciation and After-tax Salvage,You purchase equipment for$100,000,and it costs$10,000 to have it delivered and installed.(What is the capex?)Based on past information,you believe that you can sell the equipment for$17,000 when you are done with it in 6 years.The companys marginal tax r

15、ate is 40%.What is the depreciation expense each year and the after-tax salvage in year 6 for each of the following situations?,10-16,2023/5/31,Example:Straight-line,Suppose the appropriate depreciation schedule is straight-lineD=(110,000 17,000)/6=15,500 every year for 6 yearsBV in year 6=110,000 6

16、(15,500)=17,000After-tax salvage=17,000-.4(17,000 17,000)=17,000,10-17,2023/5/31,Example:Three-year MACRS p.316,BV in year 6=110,000 36,663 48,895 16,291 8,151=0,After-tax salvage=17,000-.4(17,000 0)=$10,200,10-18,2023/5/31,Example:Seven-Year MACRS,BV in year 6=110,000 15,719 26,939 19,239 13,739 9,

17、823 9,812=14,729,After-tax salvage=17,000.4(17,000 14,729)=16,091.60,10-19,2023/5/31,Example:Replacement Problem,Original MachineInitial cost=100,000Annual depreciation=9,000Purchased 5 years agoBook Value=55,000Salvage today=65,000Salvage in 5 years=10,000,New MachineInitial cost=150,0005-year life

18、Salvage in 5 years=0Cost savings=50,000 per year3-year MACRS depreciationRequired return=10%Tax rate=40%,10-20,2023/5/31,Replacement Problem Computing Cash Flows,Remember that we are interested in incremental cash flowsIf we buy the new machine,then we will sell the old machineWhat are the cash flow

19、 consequences of selling the old machine today instead of in 5 years?,10-21,2023/5/31,Replacement Problem Pro Forma Income Statements,10-22,2023/5/31,Replacement Problem Incremental Net Capital Spending,Year 0Cost of new machine=150,000(outflow)After-tax salvage on old machine=65,000-.4(65,000 55,00

20、0)=61,000(inflow)Incremental net capital spending=150,000 61,000=89,000(outflow)Year 5After-tax salvage on old machine=-10,000(outflow because we no longer receive this),10-23,2023/5/31,Replacement Problem Cash Flow From Assets,10-24,2023/5/31,Replacement Problem Analyzing the Cash Flows,Now that we

21、 have the cash flows,we can compute the NPV and IRREnter the cash flowsCompute NPV=54,801.74Compute IRR=36.28%Should the company replace the equipment?,10-25,2023/5/31,Other Methods for Computing OCF,Bottom-Up ApproachWorks only when there is no interest expenseOCF=NI+depreciationTop-Down ApproachOC

22、F=Sales Cash Costs TaxesDont subtract non-cash deductionsTax Shield ApproachOCF=(Sales Costs)(1 T)+Depreciation*T,10-26,2023/5/31,Example:Cost Cutting,Your company is considering a new computer system that will initially cost$1 million.The system is expected to last for five years and will be deprec

23、iated using 3-year MACRS.The system is expected to have a salvage value of$50,000 at the end of year 5.It will save$300,000 per year in inventory and receivables management costs.There is no impact on net working capital.The marginal tax rate is 40%.The required return is 8%.Click on the Excel icon

24、to work through the example,10-27,2023/5/31,Example:Setting the Bid Price,Consider the following information:Army has requested bid for multiple use digitizing devices(MUDDs)Deliver 4 units each year for the next 3 yearsLabor and materials estimated to be$10,000 per unitProduction space leased for$1

25、2,000 per yearRequires$50,000 in fixed assets with expected salvage of$10,000 at the end of the project(depreciate straight-line)Require initial$10,000 increase in NWCTax rate=34%Required return=15%,10-28,2023/5/31,Example:Equivalent Annual Cost Analysis,Burnout BatteriesInitial Cost=$36 each3-year

26、life$100 per year to keep chargedExpected salvage=$5Straight-line depreciation,Long-lasting BatteriesInitial Cost=$60 each5-year life$88 per year to keep chargedExpected salvage=$5Straight-line depreciation,The machine chosen will be replaced indefinitely and neither machine will have a differential

27、 impact on revenue.No change in NWC is required.The required return is 15%,and the tax rate is 34%.,10-29,2023/5/31,Quick Quiz,How do we determine if cash flows are relevant to the capital budgeting decision?What are the different methods for computing operating cash flow and when are they important

28、?What is the basic process for finding the bid price?What is equivalent annual cost and when should it be used?,10-30,2023/5/31,Comprehensive Problem,A$1,000,000 investment is depreciated using a seven-year MACRS class life.It requires$150,000 in additional inventory and will increase accounts payab

29、le by$50,000.It will generate$400,000 in revenue and$150,000 in cash expenses annually,and the tax rate is 40%.What is the incremental cash flow in years 0,1,7,and 8?,10-31,2023/5/31,Key Concepts and Skills,Understand how to determine the relevant cash flows for various types of proposed investmentsUnderstand the various methods for computing operating cash flowUnderstand how to set a bid price for a projectUnderstand how to evaluate the equivalent annual cost of a project,10-32,2023/5/31,