New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here


by: Giulia Dias Roncoletta


Marketplace > University of Miami > Finance > FIN303 > FIN303 CHAPTER 10 REVIEW
Giulia Dias Roncoletta
GPA 3.5

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Corporate Finance Management
Douglas R. Emery
Class Notes
finance, fin, notes, fin303
25 ?




Popular in Corporate Finance Management

Popular in Finance

This 4 page Class Notes was uploaded by Giulia Dias Roncoletta on Thursday February 11, 2016. The Class Notes belongs to FIN303 at University of Miami taught by Douglas R. Emery in Winter 2016. Since its upload, it has received 28 views. For similar materials see Corporate Finance Management in Finance at University of Miami.

Similar to FIN303 at UM


Reviews for FIN303 CHAPTER 10 REVIEW


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 02/11/16
CHAPTER 10 10.1 AN OVERVIEW OF ESTIMATING CASH FLOWS Capital Budgeting Cash Flows: 5 Basic Concepts : (1) cost and benefits are measured in terms of CF - not income (2) cash flow timing is CRITICAL. money is worth more the sooner u get it (3) CF must be measured on an incremental, or marginal basis - only future expenditures and revenues are relevant to decision (4) expected future cash flow is measured in an after tax basis (net gain) (5) Financing costs are not explicitly identified - the discount rate includes in it the opportunity cost for financing the project 10.2 CALCULATING INCREMENTAL CASH FLOWS 4 categories of CF: (1) net initial investment outlay (2) expected future net operating cash flow (3) non operating CF to support the project (4) Net salvage value, after-tax total amount of cash received and/or spent when project ends. (1) Net Initial Outlay: - broken-down into cash expenditures for the new capital assets, changes in net working capital, cash flow from sales of old equipment, tax impact on sale of equipment. (1) cash paid for new assets = - I (2) Increase in net working capital = - W (3) cash received on sale of old equip = S (salvage value) (4) Tax paid (saved) on sale of ^ = - T(S-B) NET CF for I I = - I - W + S - T(S-B) - An increase in working capital is the difference between the additional short term assets required minutes the additional short term liabilities generated. - Working capital is the money you need initially to get things going, but will serve as a base for your profit, and be returned at the end of the project. - Increase in working capital are outflows - Decrease in working capital are inflows - difference is the time value money cost of using the working capital during the project’s life. Tax Considerations: Two important considerations: (1) are assets being expensed or capitalized (2) tax consequences of selling Capitalizing: recording the outlay as an asset, and allocating (depreciating) the cost over future time periods. It leads to depreciation expense, allocates costs of assets to 2 or more periods. Expensed: Cash expenditures that are immediately recognized for tax purposes. Do not have any subsequent tax consequences, earliest recognized, earliest taxed. - firms wish they could expense every asset, but due to tax purposes, some assets are required to be capitalized. Whatever you can expense, do. Investment Tax Credit: credit again taxes due based on new capital investments Net Operating Cash Flow: Net Operating CF (CFAT) = R - E - T( R - E - D) R = change in periodic revenue E = change in periodic cash operating expense D = change in depreciation (1) find cash flow as operating cash flows after tax plus the deprecation tax shield (2) find he cash flow as net income plus depreciation Non operating CF: CFs not associated with operations, can occur are various points during the project. - expensed non-operating cf, are adjusted to tac by being multiplied by (1-T) Net Salvage Value: Net salvage value: is the after-tax net cash flow from terminating the project. 4 parts - sales of asset, taxes owed or saved, cleanup/removal expenses(REX), realize of net working capital Tax Liability: T(S-B) - clean up/removal expenses (REX), are expensed, therefore taxed immediately (1 -T) - net working capital is not adjusted to taxes - added cash flow (1) cash received on sale = S (2) tax paid (saved) = - T(S-B) (3) AT clean up/removal = - (1 - T)REX (4) Release of W/C = W Net Salvage Value = S - T(S - B) - (1 - T)REX + W Salvage Value = S - REX 10.3AN EXAMPLE OF INCREMENTAL CASH FLOW ANALYSIS - Pre-tax operating savings = change in expenses. (negative) - Erosion when the sales of a new product reduce the sales of an existing product - Enhancement is when an interaction among products causes the increase in value 10.4 INFLATION - Expectations of inflation affect required returns. - Present value depends on required return and expected cash flows. If any of this change, at least one more should change with it. Normal Terms: when an estimate includes inflation Real Terms: when inflation is excluded - match the required return to the cash flows - discount nominal at nominal required return, and discount real at real return rr= real required return rn= nominal required return i = inflation (1+r ) = (1+r )(1+i) n r n = rr+ i + rr 10.5 A LITTLE MORE ABOUT TAXES - a firms should use the depreciation method that provides the largest present value of depreciation tax credits. - MACRS vs STRAIGHT LINE Depreciation 10.6 EVALUATING REPLACEMENT CYCLES Replacement Cycle: Replacement Cycle: is a routine patterns that allows the machines to be up to date with technology and be replaced when the time comes. Equivalent Annual Cost (EAC): is the equivalent cost per year of owning an asset over its entire life. - 2 step application of TVM (1) calculate present value of all costs associated with asset throughout its life - purchasing price, maintenance costs, operating costs, (2) Net initial outlay be C0 and the yearly CFAT costs be C1, C2…Cn, where n is length of assets life. - smaller the EAC, the better the investment, that means the annual cost of the machine is lower. - EAC measures the replacement frequency as well Equivalent Annual Annuities: Equivalent Annual Annuity: is a useful measure for indefinitely long projects, it’s an annualized amount. - use same equations as EAC and TC, but replace: EAC = EEA TC = NPV


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Bentley McCaw University of Florida

"I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

Kyle Maynard Purdue

"When you're taking detailed notes and trying to help everyone else out in the class, it really helps you learn and understand the I made $280 on my first study guide!"

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.