FINA 365 Lecture Notes - Lecture 8: Cash Flow, Capital Budgeting, Macrs

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ambermuskrat630

6 Mar 2017

School

USC, SC, Carolina, South Carolina

Department

Finance

Course

FINA 365

Professor

Robert Hartwig

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Document Summary

So far we"(cid:448)e (cid:272)al(cid:272)ulated fcf of a proje(cid:272)t (cid:271)y (cid:271)egi(cid:374)(cid:374)i(cid:374)g with fore(cid:272)asted earnings, because practitioners usually start the capital budgeting process this way. Depreciation tax shield: the tax savings that result from the ability to deduct depreciation as an expense for tax purposes. Depreciation expenses have a positive effect on fcf. Note: firms often report a different depreciation expense for accounting and for tax purposes, so want to use the one used to report taxes. For tax purposes, many forms use: modified accelerated cost recovery. Assu(cid:373)e that li(cid:374)ksys"s (cid:373)a(cid:374)agers (cid:271)elie(cid:448)e that the ho(cid:373)enet proje(cid:272)t has risks similar to its existing projects, for which it has a cost of capital of 12%. Week 8 page 1 similar to its existing projects, for which it has a cost of capital of 12%. Based o(cid:374) our esti(cid:373)ates, ho(cid:373)enet"s npv is . (cid:1012)(cid:1010)2 (cid:373)illio(cid:374). While ho(cid:373)enet"s upfront cost is . 5 million, the present value of the additional free cash flow that.

Related Questions

1. Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over 5 years to an expected salvage value of $5,000, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, and 11% cost of capital. Show your work and formulas.

2. Calculate the present value of the depreciation tax shield for an asset in the 3-year class life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively for years 1 through 4. The firm has a 35% tax rate and a 10% cost of capital. Compare this present value to that calculated for straight-line depreciation with no salvage value. Show your work and formulas.

3. Suppose a firm has a cost of capital (WACC) of 15% and, furthermore, it has an existing capital project which is estimated to produce a NPV of $250,000. By what minimum amount must the initial cost of the project decrease (assuming revenues will be unchanged) before you would wait 2 years to invest?

harlequinbadger237

Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.90 million, operating costs of $3.90 million, and a depreciation expense of $.90 million. Assume the tax rate is 30%.

a.	Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.)

Method	Cash Flow
Adjusted accounting profits	$ million
Cash inflow/cash outflow analysis	million
Depreciation tax shield approach	million

Are the above answers equal?

	Yes

Revenues generated by a new fad product are forecast as follows:

Year	Revenues
1	$50,000
2	40,000
3	20,000
4	10,000
Thereafter	0

Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment.

a.	What is the initial investment in the product? Remember working capital.

Initial investment

If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.)

Year	Cash Flow
1	$
2
3
4

c.	If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV

d.	What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

IRR

rev: 09_24_2015_QC_CS-26391, 02_03_2015

purplejackal462

DDK Industries is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three year period. The expected market value of the project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. Project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. DDKâs cost of capital is 12% and the project does not have a distinct risk profile. DDKâs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
Depreciation		36,667	36.667	36,667
EBIT		13,333	13,333	13,333
Capital Expenditures	-110,000	0	-10,000	0

Note: Additional fixed capital investments are depreciated straight line over a three-year period; the first depreciation expense is deducted at the end of the year following the investment. The 50,000 liquidation value reflects enhancements realized through capital investments in fixed assets.

The after tax project cash flow including the terminal cash flow for the project in year 3 is closest to ___________?

goldfrog557

FINA 365 Lecture Notes - Lecture 8: Cash Flow, Capital Budgeting, Macrs

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