Fin 300 (ch.10)
OCF - changeNWC - NCS
CFFA=
pro forma financial statements
financial statements projecting future year's operations
OUT
financing costs
current assets - long term liabilities
long-term assets =
opportunity cost
most valuable alternative given up if a particular investment is undertaken (IN)
depreciation
non-cash expense, but it affects taxes, which are a cash flow
operating cash flow (OCF)
regularly generated cash flows from the ongoing activities of the project
change cash sales + change accounts receivable
revenue =
(initial cost - book value) / number of years
straight line depreciation =
OCF = (sales - costs)(1-t) + depreciation x t
tas shield approach =
depreciation tax shield
tax saving that results from the depreciation deduction, calculated as depreciation by the corporate tax rate
IN
taxes
equivalent annual cost
the present value of a project's costs calculated on an annual basis
cash flow from assets (CFFA)
the total net cash flow per period associated with a project
OCF = sales - costs - taxes
top-down approach =
sales and costs from beginning to end of the accounting period
what do sales and costs on the income statement reflect?
inflow
what does a decrease in the balance sheet indicate?
outflow
what does an increase in the balance sheet indicate?
over depreciation
what does an inflow indicate?
when made
when are sales recorded on the income statement?
sales are made
when do we record COGS from on income statement?
balance sheet
where can you find the changes in net working capital?
balance sheet
where can you find the net capital spending?
income statement
where can you find the operating cash flows?
accruals
why do we have to consider changes in NWC separately?
MACRS
1. need to know which asset class is appropriate for tax purposes 2. multiply percentage given in table by the initial cost 3. book value is zero if entire schedule is used
accelerated cost recovery system (ACRS)
depreciation method under U.S. tax law allowing the accelerated write-off of property under various classifications
D x t
depreciation tax shield =
sunk cost
a cost that has already been incurred, cannot be recovered, and should not be considered on an investment decision - OUT
(salvage-t)x(salvage-book)
after-tax salvage =
stand-alone principle
allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows
liabilities + owner equity
assets =
positive side effects
benefits to other projects (IN)
OCF = Net Income + depreciation
bottom up approach =
changes in net working capital
cash flows associated with cash on hand to smooth the current accounts
net capital spending
cash flows associated with the long-term tangible and intangible assets on a project
erosion
cash flows of a new project that come at the expense of a firm's existing projects
incremental cash flows
cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted
changing current assets - change current liabilities
change in NWC (IN) =
change costs + change accounts receivable
costs =
negative side effects
costs to other projects (IN)
