TAILIEUCHUNG - Lecture Managerial finance - Chapter 12: Cash flow estimation and risk analysis

Chapter 12 provides knowledge of cash flow estimation and risk analysis. After studying this chapter you will be able to understand: Estimating cash flows: relevant cash flows, working capital treatment, inflation; risk. | CHAPTER 12 Cash Flow Estimation and Risk Analysis Estimating cash flows: Relevant cash flows Working capital treatment Inflation Risk Proposed Project $200,000 cost + $10,000 shipping + $30,000 installation. Economic life = 4 years. Salvage value = $25,000. MACRS 3-year class. 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 Project’s incremental cash flow is: Corporate cash flow with the project Minus Corporate cash flow without the project. Treatment of Financing Costs Should you subtract interest expense or dividends when calculating CF? 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 available to all investors. They are part of the costs of capital. If .

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