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1、Chapter+12cf5-25财财务管理务管理12-2Incremental Cash FlowsnSunk Costs A cash outlay that has already been incurred and which cannot be recovered regardless of whether the project is accepted or rejected.nOpportunity Costs The return on the best alternative use of an assetnExternalitiesEffects of a project o
2、n cash flows in other parts of the firm.12-3Accounting Income vs. Cash FlowSales $100,000, Costs except Depreciation $50,000 Depreciation $30,000nAccounting Income (Profits) Sales $100,000Costs ex. Dep.- $50,000Depreciation- $30,000-Operating Income$20,000Taxes (40%)- $8,000-Net Income$12,00012-4Acc
3、ounting Income vs. Cash Flow(Continued)nCash Flows Sales $100,000Costs ex. Dep.- $50,000-Gross Cash Flow$50,000Taxes - $8,000-Net Cash Flow$42,000Net Cash Flow = Net Income + Depreciation = $42,00012-5nMars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5
4、0,000 annually. The machine falls into the MACRS 3-yr class, (33%, 45%, 15%, and 7%) and it would be sold at the end of its 3-year operating life for $60,000. The machine would require an increase in net working capital by $8,000 (spare parts inventory) when the machine is installed, but required wo
5、rking capital will return to the original level when the machine is sold after 3 years. Marss marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machines price is $140,000, and it would cost another $30,000 to modify the machine, wha
6、t is the projects NPV?Proposed Project12-6Proposed ProjectnTotal depreciable costnEquipment: $140,000nModification: $30,000nChanges in working capitalnInventories will rise by $8,000nEffect on operationsnSaving $50,000 per year12-7Proposed ProjectnLife of the projectn3 yearsnDepreciable life: MACRS
7、3-year classnSale price: $60,000nTax rate: 40%nWACC: 12%12-8Determining project valuenEstimate relevant cash flowsnCalculating annual operating cash flows.nIdentifying changes in working capital.nCalculating terminal cash flows.0 1 2 3 Initial OCF1 OCF2 OCF3 Costs+ Terminal CFs NCF0 NCF1 NCF2 NCF312
8、-9Initial year net cash flownFind NWC.n in inventories of $8,000nCombine NWC with initial costs.Equipment -$140,000 Modification -30,000 NWC -8,000Net CF0 -$178,00012-10Determining annual depreciation expenseYearRate x BasisDepr 10.33 x$170$56.1 20.45 x 170 76.5 30.15 x 170 25.5 40.07 x 170 11.91.00
9、$170Depreciable Basis = Equipment cost + shipping + installation + modificationDue to the MACRS -year convention, a 3-year asset is depreciated over 4 years.12-11Annual operating cash flows123Revenues50.050.050.0- Deprn Expense-56.1-76.5-25.5Operating Income (BT)-6.1-26.524.5- Tax (40%)2.4410.6-9.8N
10、et Income-3.66-15.914.7+ Deprn Add-back56.176.525.5Operating CF52.4460.640.2(Thousands of dollars)12-12Terminal net cash flowRecovery of NWC $8,000Sale Price 60,000Tax on Gain (40%) -19,240Terminal CF$48,760Tax Calculation:Sale Price = $60,000, Book Value = $11,900Taxable Profit = 60,000 11,900 = 48,100Tax = 48,100 0.4 = 19,24012-13Proposed projects cash flow time linenEnter CFs into calculator CFLO register, and enter I/YR = 12%.nNPV = -$19,548.65nReject!0 1 2 3 -178 52.44 60.6 40.2 Terminal CF 48.76 88.96
