FIN302: Chapter 11 Notes
FIN302: Chapter 11 Notes FIN302
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This 4 page Bundle was uploaded by Giulia Dias Roncoletta on Monday October 26, 2015. The Bundle belongs to FIN302 at University of Miami taught by Frank Peterson in Summer 2015. Since its upload, it has received 87 views. For similar materials see FIN 302 - Fundamentals of Finance in Finance at University of Miami.
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Date Created: 10/26/15
CHAPTER 11 NOTES Making Capital Investment Decisions Capital Budgeting process of selecting which assets a business should invest in dictates the nature scope and profitability of business and it is critically important decision process in any business and its its tied to the wealth creation Value of asset is the present value of all future cash flows that accrue to the benefit of the owner Is the investment worth more than its costs Does it provide a return that exceeds the cost of financing it Capital Investment Analysis 0 timeline 1 1 1 1 1 1 I I I I I Iquot3939 W CF CF 6 d CFQ CFquot k J V Fru Cash Flows How do w dawn the cash ow First Forecast relevant cash flows only Incremental Cash Flows are relevant for Capital Investment Incremental are cash flows that arise solely from the investment difference in the firm s cash low with to without the project Components of Cash Flow you must consider 1 initial capital outlay 2 changes in wok in capital inventory 3 salvage valuerecovery of invested capital 4 incremental operating cash flows taxes Potential Pit Falls sunk cost already incurred and can t be reversed NOT INCREMENTAL COSTS opportunity cost value of options lost due to undertaking the project INCREMENTAL COSTS allocated costs overhead sunk costs NOT INCREMENTAL EXCLUDE financial costs in the discount rate separating of investment and financing decision order of proposal doesn39t matter company financed as a goingconcern dont include tax benefit of interest First Forecast relevant incremental revenues and expenses and a list of assumptions NOPAT net operating profit after tax EBIT tax onEBlT ignore interest Formulas For Operating Cash Flows OCF EBIT tax on EBIT Depreciations OCF EBIT1T Depreciation OCF EBITDA1T Depreciation T OCF NOPAT Depreciation Notes DepreciationT the depreciation tax shielf NOPAT EBIT TAX on EBIT EBIT1T Taxes amp Depreciations a tax payment is a cashflow and depreciation has tax implications 1 depreciation is a tac deducted which provides a depreciation tax shield 2 Salvage value may produce a taxable gain or loss but we must know the asset s adjusted Basis to calculate it Depreciation Tax Shield is the tax savings arising from the depreciations deduction noncash expense tax deduction reduces taxable income indirectly effects cash flow through the tax calculation Tax Depreciation MACRS differs from the depreciation methods used for financial reporting asset classes 1 three year property 2 fiveyear property 3 sevenyear property rates are applied to original costs and note halfyear conversions Dy sang Mm the 39Mk wcm ml my 35 lass ta quot11 i 539 576 39quot I 039 5 7 JV 5i 39 51 After Tax Salvage Value is an asset is sold for more or less than its adjusted tax basis the resulting gain or loss will have a tax consequence the adjusted tax basis depreciation net book value for tax purposes o er I dd quotV v m Mr v Tax on Salvage Value proceeds ingorm Mjuxced Tax Basis may l 34 39s 50 c I Tax gain ar A155 x Wool tax rate Tax liability mrnmy w 195 Solvogc proceeds 5 got m 1 Tax liability 3 quotMiaf R quotlath Aftertax suing m with 0 6 0 1 360 x 35 3 3 976 20 000 3 976 I604 Example Problems ADC mar939 oMQOOWWMul umbmumdoud maul M M ampc u chMdh btgduwm g leJuod uml m1 carton w silt m W a am 400 you W Thorupcth NW quotmightlint MM quotnu39 39 nd quot67 Momma 35WOcmchndol 12 who a the rcpt W c 7 3 5 m as 33 man mam mono 0 l 2 3 d 5 W in an LUTrJIi Ll 301 grain mpg quot an nan an max 209000 mm 057 150 50 54 9 150 a mum m uquot masc mun mm new an UUJJL max H5100 Ham 1 quot w m 0c awns yam Z39B SC 25153 25190 WC 0 00 W wimlnlr mquot we o T m39m m an mono no 150 150 50 no 9 139quot tacos pug mquotquot quot FmCath mac000m 2am mm 2mm 2552 1mm MY w 0 3w 3m 30 90 w m 3 ra39mm on vw Iv mom an nan um quotm quotSquot 39 Ammanu mam alum an man man mmumodeunm m mmuwnmmmvnmmuszw 5 I n l r 1 39 I r mmp39mumuulmdmwngmwwl hu r w v v Mucth Wtsmmdmosmju39mowm WAY aw s t a r w w w It cup a nu nul Inc all run un quotan n o g 2 3 4 5 5 7 cutno mm mm mm mm mm quot1 mm an 1 l 1 1 l 1 l l I Y I Y Y Y Y T I Inquot I 1 WC 3 3 00 I 2 2 2 2 2 2 2 390 ll 2 2 2 2 2 2 2 6 but No ON C xl2 00 noooaooox IT 2000000 CO1 WW iv cocoon F01 v 7 mwusaoarz oz6000000 llmm mun no3quot 01000 Assessing the Results shortcomings of discrete analysis what are the key assumptions whats the range of possible results what are the risks how bad could it get sensitivity to assumption changes What it TN MON 39N EatNM Tranquot Who on a N bunt malt391
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