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