Cash Flow Estimation and Risk Analysis.ppt
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1、Estimating cash flows:Relevant cash flowsWorking capital treatmentInflationRisk Analysis: Sensitivity Analysis, Scenario Analysis, and Simulation Analysis,CHAPTER 8Cash Flow Estimation and Risk Analysis,Cost: $200,000 + $10,000 shipping + $30,000 installation.Depreciable cost $240,000.Economic life
2、= 4 years.Salvage value = $25,000.MACRS 3-year class.,Proposed Project,Annual unit sales = 1,250.Unit sales price = $200.Unit costs = $100.Net operating working capital (NOWC) = 12% of sales.Tax rate = 40%.Project cost of capital = 10%.,Incremental Cash Flow for a Project,Projects incremental cash f
3、low is:Corporate cash flow with the projectMinus Corporate cash flow without the project.,NO.We discount project cash flows with a cost of capital that is the rate of return required by all investors (not just debtholders or stockholders), and so we should discount the total amount of cash flow avai
4、lable to all investors. They are part of the costs of capital. If we subtracted them from cash flows, we would be double counting capital costs.,Should you subtract interest expense or dividends when calculating CF?,NO. This is a sunk cost. Focus on incremental investment and operating cash flows.,S
5、uppose $100,000 had been spent last year to improve the production line site. Should this cost be included in the analysis?,Yes. Accepting the project means we will not receive the $25,000. This is an opportunity cost and it should be charged to the project.A.T. opportunity cost = $25,000 (1 - T) =
6、$15,000 annual cost.,Suppose the plant space could be leased out for $25,000 a year. Would this affect the analysis?,Yes. The effects on the other projects CFs are “externalities”.Net CF loss per year on other lines would be a cost to this project.Externalities will be positive if new projects are c
7、omplements to existing assets, negative if substitutes.,If the new product line would decrease sales of the firms other products by $50,000 per year, would this affect the analysis?,Basis = Cost + Shipping + Installation $240,000,What is the depreciation basis?,Year1234,% 0.330.450.150.07,Depr.$ 79.
8、2 108.0 36.0 17.8,x Basis =,Annual Depreciation Expense (000s),$240,Annual Sales and Costs,Year 1Year 2Year 3Year 4Units1250125012501250Unit price$200$206$212.18$218.55Unit cost$100$103$106.09$109.27Sales$250,000$257,500$265,225$273,188Costs$125,000$128,750$132,613$136,588,Why is it important to inc
9、lude inflation when estimating cash flows?,Nominal r real r. The cost of capital, r, includes a premium for inflation.Nominal CF real CF. This is because nominal cash flows incorporate inflation.If you discount real CF with the higher nominal r, then your NPV estimate is too low.,Continued,Inflation
10、 (Continued),Nominal CF should be discounted with nominal r, and real CF should be discounted with real r.It is more realistic to find the nominal CF (i.e., increase cash flow estimates with inflation) than it is to reduce the nominal r to a real r.,Operating Cash Flows (Years 1 and 2),Year 1Year 2S
11、ales$250,000$257,500Costs$125,000$128,750Depr.$79,200$108,000EBIT$45,800$20,750Taxes (40%)$18,320$8,300NOPAT$27,480$12,450+ Depr.$79,200$108,000Net Op. CF$106,680$120,450,Operating Cash Flows (Years 3 and 4),Year 3Year 4Sales$265,225$273,188Costs$132,613$136,588Depr.$36,000$16,800EBIT$96,612$119,800
12、Taxes (40%)$38,645$47,920NOPAT$57,967$71,880+ Depr.$36,000$16,800Net Op. CF$93,967$88,680,Cash Flows due to Investments in Net Operating Working Capital (NOWC),NOWC Sales (% of sales) CFYear 0$30,000-$30,000Year 1$250,000$30,900-$900Year 2$257,500$31,827-$927Year 3$265,225$32,783-$956Year 4$273,188$
13、32,783,Salvage Cash Flow at t = 4 (000s),Salvage valueTax on SVNet terminal CF,$25 (10) $35,What if you terminate a project before the asset is fully depreciated?,Cash flow from sale = Sale proceeds- taxes paid.Taxes are based on difference between sales price and tax basis, where:Basis = Original b
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