managerial finance exam
nimab8
Ch10NPVinmoredetail.pptxDr. Ekaterina Chernobai
p. 1
FRL 3000
Instructor: Dr. Ekaterina Chernobai
Chapter 10 “Making Capital Investment Decisions”
1
Dr. Ekaterina Chernobai
p. 2
In this Chapter
From Chapter 9, the Net Present Value approach appears to be the mst accurate one!
0 (today) 1 2 3 4 5 ….
-initial cost
CF1
CF2
CF3
CF4
In this Chapter……. Where do these CFs actually come from?
Dr. Ekaterina Chernobai
p. 3
Identifying relevant cash flows (1 of 5)
taxes
depreciation expense
wages to employees
$ paid to consultants
Initial purchase price
Interest payments on debt
lost revenues from existing projects
Which cash flows are RELEVANT to project valuation (i.e., should be included into NPV calculations) ?
Which cash flows are IRRELEVANT to project valuation (i.e., should be completely ignored) ?
Dr. Ekaterina Chernobai
p. 4
Identifying relevant cash flows (2 of 5)
Relevant cash flows = incremental cash flows
= cash flows that are incremental to a firm’s existing cash flows, and that are a direct consequence of taking the project
= They will only occur if the project is accepted
= These cash flows should be included in a capital budgeting analysis (i.e., calculating NPV)
Dr. Ekaterina Chernobai
p. 5
“The Stand-Alone Principle”
= analyze each project in isolation from the firm simply by focusing on these incremental cash flows
Identifying relevant cash flows(3 of 5)
In other words, we don’t need to waste time calculating future cash flows to the firm without the project, then with the project!
Simply calculate the cash flows generated by the project, separately from the cash flows of the original Firm.
Dr. Ekaterina Chernobai
p. 6
Identifying relevant cash flows (5 of 5)
Common cash flows, and their relevance/irrelevance for NPV calculation:
| cash flow | explanation | examples | relevant? |
| “sunk costs” | Already occurred. Not recoverable, even if project is rejected. | R&D, paying a consulting firm. | no |
| financing costs | Interest expenses. Usually ignored. | Payments on funds raised by issuing bonds, taking bank loans. | no |
| side effects, or “spillover” effects or project externalities | Negative effect (“erosion”) or positive effect (“synergy”) on CFs of firm’s existing projects | After i-phones came out, i-pod sales dropped (“erosion”), and i-tunes & Mac revenues rose (“synergy”). | yes |
| opportunity costs | Foregone revenues from an alternative project. | Project: converting a parking lot into an office bldg. The lot could instead be sold | yes |
| net working capital (NWC) | = current assets – current liabilities | Set aside cash, buy inventory, ↑ or ↓ in accts payable and accts receivable | yes |
| taxes | paying corporate taxes | If TC=0.34, pay 34% of taxable income. | yes |
| sales revenue, fixed & variable costs, depreciation, initial investment, salvage value | (see examples later in this Ch.) | yes |
Dr. Ekaterina Chernobai
p. 7
Project CF1 Project CF2 Project CF3 …
Project Cash Flows (1 of 4)
Use relevant cash flows to calculate Project Cash Flows for each year:
today (year 0) in 1 year in 2 years in 3 years …
time line
Project CF0
Calculate Net Present Value (NPV):
NPV = Project CF0+Project CF1/(1+R) +Project CF2/(1+R)2 +Project CF3/(1+R)3+…
Evaluate. Accept the project if NPV>0. Reject if NPV<0.
Figure out which cash flows are relevant, and which are not.
In general, these steps must be followed to calculate NPV:
#1
#2
#3
#4
a.k.a. “free cash flow” from Ch.2
Dr. Ekaterina Chernobai
p. 8
Project CF0
How should we calculate Project Cash Flows for each year?
Project CF1 Project CF2 Project CF3 …
today (year 0) in 1 year in 2 years in 3 years …
To calculate each, need to use this general formula:
Project Project Project Project
cash flow operating cash flow net capital spending change in net working capital
(OCF) (NCS) (Δ NWC)
Project Cash Flows (2 of 4)
Dr. Ekaterina Chernobai
p. 9
Project Project Project Project
cash flow operating cash flow net capital spending change in net working capital
(OCF) (NCS) (Δ NWC)
Cash flow from sales that the project generates
(each year in future)
Short-term investment related cash flows:
Set aside additional cash each year
Acquire new inventory
Increase/decrease in accts payable & accts receivable
(year 0, final year and possibly years in between)
Long-term investment related cash flows:
Initial investment (year 0 only),
Salvage value from selling an old machine (year 0),
Salvage value from selling the new machine (final year),
Opportunity cost (year 0 and possibly final year)
Project Cash Flows (3 of 4)
Dr. Ekaterina Chernobai
p. 10
Project Cash Flows (4 of 4)
1.) Operating Cash Flow (OCF),
2.) Net Capital Spending (NCS),
3.) Change in Net Working Capital (Δ NWC)
Before we do a capital budgeting example, let’s first look in more detail at:
Dr. Ekaterina Chernobai
p. 11
Operating Cash Flow (1 of 7)
1.) Operating Cash Flow (OCF):
Idea:
It shows annual profit from sales.
But it’s NOT THE SAME as “net income”!
Dr. Ekaterina Chernobai
p. 12
Operating Cash Flow (2 of 7)
Why?—Because financing expenses are irrelevant (usually) for capital budgeting decisions – see earlier Table
If we borrow to partially finance initial investment, we will (usually) make an adjustment for this in the discount rate.
We will ignore interest expenses
Income statement:
Sales revenue
- Costs of goods sold
- Depreciation
EBIT
- Interest expenses
Taxable Income (EBT)
- Taxes @TC = …%
Net Income
Dr. Ekaterina Chernobai
p. 13
Income statement:
Sales revenue
- Costs of goods sold
- Depreciation
EBIT
- Interest expenses
Taxable Income (EBT)
- Taxes @TC = …%
Net Income
Is this how much we REALLY make in profit??
No! “Depreciation” is NOT an actual cash expense!! Should be added back!!
Operating Cash Flow (3 of 7)
Dr. Ekaterina Chernobai
p. 14
OCF = EBIT + Depreciation – Taxes
By definition, Operating Cash Flow (OCF) is:
Add Depreciation back because it’s not an actual cash expense
Operating Cash Flow (4 of 7)
Dr. Ekaterina Chernobai
p. 15
EXAMPLE
Over one year, a firm’s sales revenue equals $50,000, production costs equal $30,000, depreciation expense for tax purposes equals $8,000, corporate tax rate is 34%. Calculate Operating Cash Flow.
Income Statement
Sales revenue $50,000
- Costs -$30,000
- Depreciation -$8,000
EBIT $12,000
- Taxes @ TC=34% $4,080 = $12,000 x 0.34
Net Income $7,920 = $12,000 - $4,080
OCF = EBIT + Depreciation – Taxes =
= $12,000 + $8,000 - $4,080 = $15,920
Solution:
Operating Cash Flow (5 of 7)
Dr. Ekaterina Chernobai
p. 16
3 more ways to calculate OCF:
1.)The Bottom-Up Approach
3.)The Tax Shield Approach
2.)The Top-Down Approach
Sales revenue $50,000
-Costs -$30,000
-Depreciation -$8,000
EBIT $12,000
-Taxes (TC=34%) $4,080
Net Income $7,920
OCF =
=Net Income + Depreciation
= $7,920 + $8,000
Sales revenue $50,000
-Costs -$30,000
-Depreciation -$8,000
EBIT $12,000
-Taxes (TC=34%) $4,080
Net Income $7,920
OCF =
=Sales – Costs – Taxes
= $50,000 - $30,000 - $4,080
Sales revenue $50,000
- Costs -$30,000
- Depreciation -$8,000
EBIT $12,000
- Taxes (TC=34%) $4,080
Net Income $7,920
depreciation
OCF = tax shield
=(Sales–Costs)(1–TC) + Depreciation(TC)
=(50,000-30,000)(1-0.34)+8,000*0.34
= $15,920
= $15,920
= $15,920
Operating Cash Flow (6 of 7)
Dr. Ekaterina Chernobai
p. 17
Question: So, which OCF approach is the best??
Answer: All give the same answer.
Use whichever you like better!
Operating Cash Flow (7 of 7)
Dr. Ekaterina Chernobai
p. 18
Main components of NCS:
buy new asset (year 0) ……...……………………...$ spent
salvage value from selling old asset (year 0)……..$ received
salvage value from selling new asset (final year)...$ received
2.) Net Capital Spending (NCS)
Net Capital Spending (1 of 19)
Dr. Ekaterina Chernobai
p. 19
today next year in 2 years …
0 1 2
EXAMPLE
A firm wants to buy a new machine which will make production more efficient. It will cost $80,000 to purchase the new machine today. It can get $30,000 for selling the machine when it will be sold in 2 years.
What is net capital spending related to this machine?
new machine
get $30,000
spend $80,000
Project Net Capital Spending (NCS) in year 0 = $80,000 (spent)
Project Net Capital Spending (NCS) in year 2 = $30,000 (received)
time line
Net Capital Spending (2 of 19)
Dr. Ekaterina Chernobai
p. 20
$30,000 is what the Firm gets when selling the machine in 2 years.
Q: Where does this number ($30,000) come from??
A: In general, money received from selling an asset
(a.k.a. salvage value) is not simply the sale price!
Net Capital Spending (3 of 19)
$80,000 is simply the purchase price of the new machine.
A.k.a. initial investment
Dr. Ekaterina Chernobai
p. 21
Salvage value depends on:
- market sale price
- book value
Let’s see how …
Net Capital Spending (4 of 19)
Dr. Ekaterina Chernobai
p. 22
When a Firm buys a physical asset, the purchase price becomes its initial value
a.k.a. initial Book Value
Net Capital Spending (5 of 19)
Dr. Ekaterina Chernobai
p. 23
According to www.irs.gov,
“Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.”
One can calculate Annual Depreciation.
Treated as “expense” in Income Statement
Net Capital Spending (6 of 19)
Dr. Ekaterina Chernobai
p. 24
As the Firm uses the asset for business, over the years accumulated depreciation increases, and remaining book value decreases
At any point of time:
The remaining book value = the original purchase price – accumulated depreciation since that time
Net Capital Spending (7 of 19)
Dr. Ekaterina Chernobai
p. 25
Q: A firm will eventually decide to sell the asset.
How much money will it get back?
A: It will get the amount called “salvage value” (or, more precisely, “after-tax salvage value”)
It directly depends on the remaining book value
It may be
- exactly equal to the sale price,
- or lower than the sale price,
- or higher than the sale price
Net Capital Spending (8 of 19)
Dr. Ekaterina Chernobai
p. 26
Tax savings
Because the firm must have overpaid taxes over time
Why?
Remaining book value is high only when depreciation each year has been low. Low depreciation means high taxable income. High taxable income means higher taxes paid to the government.
Sale (after-tax)
proceeds: salvage value = sale price + TC (remaining book value – sale price)
Net Capital Spending (9 of 19)
Firm gets back MORE than the sale price if remaining book value > sale price
Buy price = “Initial book value”
Remaining book value
Sale price
Buy here
Sell here
Dr. Ekaterina Chernobai
p. 27
Tax liability
Because the firm must have underpaid taxes over time
Why?
Remaining book value is low only when depreciation each year has been high. High depreciation means low taxable income. Low taxable income means lower taxes paid to the government.
Sale (after-tax)
proceeds: salvage value = sale price – TC (sale price – remaining book value)
Net Capital Spending (10 of 19)
Firm gets back LESS than the sale price if remaining book value < sale price
Buy price = “Initial book value”
Remaining book value
Sale price
Buy here
Sell here
Dr. Ekaterina Chernobai
p. 28
So, how exactly do assets DEPRECIATE
over time
(for tax purposes)?
Net Capital Spending (11 of 19)
Dr. Ekaterina Chernobai
p. 29
Case 1:
Straight line depreciation
Case 2:
Depreciation under M.A.C.R.S.
= Modified Accelerated Cost Recovery System
Depreciation
Most common. E.g., equipment, machinery, vehicles
Less common. E.g., some intangible property (patents, software, etc.), real property like bldg’s
Net Capital Spending (12 of 19)
Dr. Ekaterina Chernobai
p. 30
remaining Book Value
Case 1: Straight line depreciation
Annual depreciation = original purchase price / economic life
Accumulated depreciation over N years = N*annual depreciation
Remaining Book Value = original purchase price – accumulated depreciation
year
economic life
Depreciation is the same each year
!
purchase price
=original Book Value
Depreciation in yr 1
Depreciation in yr 2
Depreciation in yr 3
1 2 3 …
.
.
.
straight line
Net Capital Spending (13 of 19)
Dr. Ekaterina Chernobai
p. 31
0 1 2 3
economic life
remaining Book Value
$12,000
$8,000
$4,000
0
year
EXAMPLE
A company is buying a new piece of equipment for $12,000. Its economic life is 3 years. It will depreciate at the same rate each year. The company is planning to sell it in 2 years for $3,000. TC=34%. What will be the after-tax salvage value?
| Annual depreciation | Accumulated depreciation | Remaining Book Value | |
| year 0 | – | – | 12,000 |
| year 1 | 12,000 / 3 = 4,000 | 4,000 | 12,000 – 4,000 = 8,000 |
| year 2 | 4,000 | 2 x 4,000 = 8,000 | 12,000 – 8,000 = 4,000 |
| year 3 | 4,000 | 3 x 4,000 = 12,000 | 12,000 – 12,000 = 0 |
straight line
Net Capital Spending (14 of 19)
Dr. Ekaterina Chernobai
p. 32
What will be the after-tax salvage value at the end of year 2?
Sale price is $3,000, and the remaining book value is $4,000
This means tax savings
Tax savings =
0.34 x ($4,000 – $3,000)
= $340
After-tax salvage value =
sale price + tax savings
= $3,000 + $340
= $3,340
Net Capital Spending (15 of 19)
Dr. Ekaterina Chernobai
p. 33
Case 2: Depreciation under M.A.C.R.S.
Annual depreciation= original purchase price * MACRS % for that year
Accumulated depreciation over N years = Sum of N annual depreciations
Remaining Book Value= original purchase price – accumulated depreciation
Depreciation is NOT the same each year
Mid-year convention: treat all assets as if they were placed in service at mid-year. As a result, depreciation is spread over an extra one year.
Example: 3-year class asset
depreciates over 4 tax years.
Different annual depreciation rates for different asset classes
remaining Book Value
year
economic life
purchase price
=original Book Value
Depreciation in yr 1
Depreciation in yr 2
Depreciation in yr 3
1 2 3 …
!
Net Capital Spending (16 of 19)
Dr. Ekaterina Chernobai
p. 34
Different annual depreciation rates for different property classes:
Table 10.7 in textbook
Modified A.C.R.S. Depreciation Allowances
Computers, monitors, printers, refrigerators, autos
Office furniture and equipment, most industrial equipment
Special tools for manufacturing, equipment used for research
In our book:
Even more on www.irs.gov: < click here >
Net Capital Spending (17 of 19)
Dr. Ekaterina Chernobai
p. 35
0 1 2 3 4
remaining Book Value
$12,000
$8,000
$2,667
$889
0
year
EXAMPLE
A company is buying a new piece of equipment for $12,000. Its economic life is 3 years. It will depreciate according to the 3-year property class under MACRS. The company is planning to sell it in 2 years for $3,000. TC=34%.
What will be the after-tax salvage value?
| Annual depreciation | Accumulated depreciation | Remaining Book Value | |
| year 0 | – | – | 12,000 |
| year 1 | 0.3333*12,000 = 4,000 | 4,000 | 12,000 – 4,000 = 8,000 |
| year 2 | 0.4444*12,000 = 5,333 | 4,000+5,333= 9,333 | 12,000 – 9,333 = 2,667 |
| year 3 | 0.1482*12,000 = 1,778 | 9.333+1,788 = 11,111 | 12,000– 11,111 = 889 |
| year 4 | 0.0741*12,000 = 889 | 11,111+889 =12,000 | 12,000– 12,000 = 0 |
MACRS % from Table 10.7
Net Capital Spending (18 of 19)
Dr. Ekaterina Chernobai
p. 36
What will be the after-tax salvage value at the end of year 2?
Sale price is $3,000, and the remaining book value is $2,667
This means tax liability
Tax liability =
0.34 x ($3,000 – $2,667)
= $113.22
After-tax salvage value =
sale price – tax liability
= $3,000 – $113.22
= $2,886.78
Net Capital Spending (19 of 19)
Dr. Ekaterina Chernobai
p. 37
Net Working Capital (NWC) = current assets – current liabilities
| Assets | Liabilities & Equity |
| Current Assets: cash inventory accts receivable Fixed (long-term) assets: Net plant & equipment | Current liabilities: accts payable Long-term debt Equity |
Balance Sheet:
3.) Change in Net Working Capital
Change in Net Working Capital (1 of 3)
Dr. Ekaterina Chernobai
p. 38
Example: the change in NWC this year is positive (negative) if …
…if a Firm invested more (less) money into current assets,
…if a Firm invested less (more) money into current liabilities
Example: the change in NWC this year = 0 if …
…if a Firm kept the same amount of cash on hand as last year,
…if it owes the same amount to inventory suppliers as last year
(accts payable),
…if it kept the same amount of inventory as last year,
…if it kept the same amount of credit sales as last year
(accts receivable)
What is “change in NWC”?
Change in Net Working Capital (2 of 3)
Dr. Ekaterina Chernobai
p. 39
EXAMPLE
The FRL department decided to spend $5,000 to buy a brand new Xerox machine for its faculty. It is estimated to last 4 years. It will be necessary to immediately set aside $400 in cash as a buffer against unforeseen repair costs. This amount will be increasing by 50% each following year until the cash buffer is no longer needed by the end of the final year of the machine life.
Calculate the change in NWC for each year.
Solution:
0 (today) 1 2 3 4
$400
New set aside: $400
Δ in NWC
NWC
New set aside: $200
New set aside: $300
New set aside: $450
Recover
$1,350
$400*1.5=$600
$600*1.5=$900
$900*1.5=$1,350
$0
Total set aside:
Total set aside:
Total set aside:
Total set aside:
Total set aside:
cash OUTflow
“ – “
cash INflow
“ + “
Change in Net Working Capital (3 of 3)
Dr. Ekaterina Chernobai
p. 40
A capital budgeting example (1 of 8)
EXAMPLE
Capital budgeting example.
Cal Poly is considering to open a pizza restaurant in the newly built library wing. It will cost $100,000 to buy all the necessary equipment, furniture and pay for the interior design. The restaurant will be operating for 4 years after which all assets are expected to be sold at a market price of $30,000. The restaurant’s equipment falls into the 5 year property class under MACRS.
Rent and other fixed costs will equal $10,000 per year, and variable costs will be 20% of the sales revenue. 15,000, 20,000, 25,000 and 30,000 pizzas will be sold in years 1, 2, 3 and 4, at $10 each.
The management will also need to immediately set aside and keep each year $2,000 in cash to cover unforeseen expenditures, and this amount will be fully recovered by the end of the project’s life. Corporate tax rate equals 34%, and annual interest rate is 10%.
Is it worth opening this restaurant?
Dr. Ekaterina Chernobai
p. 41
A capital budgeting example (2 of 8)
“ – “ for cash outflows (money spent)
“ + ” or no sign for cash inflows (money received)
In our capital budgeting calculations, we’ll be using:
Dr. Ekaterina Chernobai
p. 42
A capital budgeting example (3 of 8)
Solution:
Step 1: For each year:
calculate operating cash flow (OCF),
calculate net capital spending (NCS),
calculate change in net working capital (Δ NWC).
Add up to calculate Total Cash Flow from the project for each year
Step 2: Use these Total Cash Flows to calculate Net Present Value
Step 3: Evaluate. If NPV is positive, the project should be accepted
Dr. Ekaterina Chernobai
p. 43
A capital budgeting example (4 of 8)
Step 1: Calculate Project Operating Cash Flow (OCF) for each year
0 (today) 1 2 3 4
# pizzas
Price per pizza
Sales revenue
= #pizzas x price
Fixed costs
Variable costs
=revenue x 20%
Total costs
=fixed + variable costs
MACRS % (Table 10.7)
Depreciation
=MACRS%x$100,000
OCF
=(sales-costs)x(1-TC) +Depreciation xTC
15,000 20,000 25,000 30,000
$10 $10 $10 $10
-$10,000 -$10,000 -$10,000 -$10,000
20% 32% 19.2% 11.5%
$150,000 $200,000 $250,000 $300,000
-$30,000 -$40,000 -$50,000 -$60,000
-$40,000 -$50,000 -$60,000 -$70,000
$20,000 $32,000 $19,200 $11,500
$79,400 $109,880 $131,928 $155,710
=(150,000-40,000)x(1-0.34)
+20,000x0.34
43
Dr. Ekaterina Chernobai
p. 44
A capital budgeting example (5 of 8)
Calculate Project Net Capital Spending (NCS) for each year
0 (today) 1 2 3 4
NCS
-$100,000
100K -20K -32K -19.2K -11.5K=
$17,300
$20,000 $32,000 $19,200 $11,500
30K-0.34(30K-17.3K)=
$25,682
-$100,000 --- --- --- $25,682
Remaining book value
=100,000-∑depr.
Initial investment (given)
Salvage value
Depreciation (from last slide)
44
Dr. Ekaterina Chernobai
p. 45
A capital budgeting example (6 of 8)
Calculate project change in NWC for each year
0 (today) 1 2 3 4
Δ in NWC
-$2,000 -$2,000 -$2,000 -$2,000 $0
-$2,000 (invest)
NWC:
cash, set aside as of end of each year
---
$2,000
(recover)
---
---
45
Dr. Ekaterina Chernobai
p. 46
A capital budgeting example (7 of 8)
Now, add the three up to find the total cash flow for each year
0 (today) 1 2 3 4
$79,400 $109,880 $131,928 $155,710
-$100,000 $25,682
-$2,000 --- --- --- $2,000
OCF
NCS
Δ in NWC
Project cash flow
=OCF+NCS+ΔNWC
-$102,000 $79,400 $109,880 $131,928 $183,392
---
---
---
---
46
Dr. Ekaterina Chernobai
p. 47
A capital budgeting example (8 of 8)
0 (today) 1 2 3 4
-$102,000 $79,400 $109,880 $131,928 $183,392
Step 2: Use these Project Cash Flows of the project to find NPV:
-$102,000 + $79,400 + $109,880 + $131,928 + $183,392
1 + 0.1 (1 + 0.1)2 (1 + 0.1)3 (1 + 0.1)4
= $ 285,370.4
Step 3: Evaluate. NPV > 0, so ______ the project
Project Cash Flow
NPV =
accept
Use “cash flow keys” to do this all in just one step in financial calculator!
given
Dr. Ekaterina Chernobai
p. 48
Special case of capital budgeting: “cost cutting” (1 of 3)
EXAMPLE
Ralphs is considering buying a new cutting edge cash register that will initially cost $1 million. It will save Ralphs $400,000 a year. The register is expected to last 5 years after which it is expected to sell for $100,000. It will be depreciated using 3-year MACRS. There is no impact on net working capital. The tax rate is 34% and the required rate of return is 8%.
What is the NPV of this project?
Dr. Ekaterina Chernobai
p. 49
Special case of capital budgeting: “cost cutting” (2 of 3)
Step 1:
0 (today) 1 2 3 4 5
Revenue
Costs
MACRS %
Depreciation
=1,000,000*MACRS%
OCF
=savings (1-TC)+Depr.*TC
NCS
Δ NWC
Project Cash Flow
=OCF+NCS+ΔNWC
-- 33.3% 44.4% 14.8% 7.4% 0%
savings
-- $400,000 $400,000 $400,000 $400,000 $400,000
-- $333,000 $444,000 $148,000 $74,000 $0
-- $377,220 $414,960 $314,320 $289,160 $264,000
100K-0.34(100K-0)=
-$1,000,000 -- -- -- -- =$66,000
-- -- -- -- -- --
-$1,000,000 $377,220 $414,960 $314,320 $289,160 $330,000
Given: …It will save Ralphs $400,000 a year…
Dr. Ekaterina Chernobai
p. 50
Special case of capital budgeting: “cost cutting” (3 of 3)
-$1,000,000 + $377,220 + $414,960 + $314,320 + $289,160 + $330,000
(1+0.08) (1+0.08)2 (1+0.08)3 (1+0.08)4 (1+0.08)5
= $391,690.1
-$1,000,000 $377,220 $414,960 $314,320 $289,160 $330,000
Project
cash
flow
(from prev. slide)
0 (today) 1 2 3 4 5
Step 2:
Step 3: Evaluate: _________________________.
NPV > 0, so accept the project
NPV =
Use “cash flow keys” to do this all in just one step in financial calculator!
given
Dr. Ekaterina Chernobai
p. 51
Summary
How do we determine if cash flows are relevant to the capital budgeting decision?
The 3 components of Total Cash Flow for each year are ……
What is “Operating Cash Flow”?
What does “Net Capital Spending” include?
What is the difference between “Net Working Capital” and “change in Net Working Capital”? Which one do we include in Total Cash Flow for each year?
