FINC 311 Ch 9
Book Value vs After-Tax Salvage Value
BV = Initial Cost - Accumulated Depr. ATSV = Salvage Amt. - TR[Salvage Amt. - BV]
OCF
EBIT + Depreciation - Taxes NI + Depreciation
side effects
when a company launches a new product, there could be "spillover" impacts on the sales of existing products
Net Working Capital (NWC)
current assets - current liabilities
pro forma financial statements
financial statements projecting future years' operations summarizes all the relevant information
Sensitivity Analysis
investigation of what happens to NPV when only one variable is changed
After-Tax Salvage Value
needs to be determined if there is value in a fixed asset at the end of a project
Tax Shield OCF
(sales - costs)*(1-TR)+(Depr.*TR)
NPV-Forecasting Risk
The possibility that errors in projected cash flows will lead to incorrect decisions Also called- estimation risk
Sunk Cost
a cost that has already been committed and cannot be recovered should not be considered in an investment decision
Cash Flow from Assets
operating cash flow - net capital spending - change in net working capital
Relevant Cash Flows
opportunity costs, side effects/erosion, net working capital, tax effects, after tax salvage value
Non-relevant Cash Flows
sunk costs financing costs
erosion
the cash flow of a new project that comes at the expense of a firm's existing projects
Scenario Analysis
the determination of what happens to NPV estimates when we ask what-if questions
opportunity cost
the most desirable alternative given up as the result of a decision
Depreciation Tax Shield
the tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate