FIN 323 : Chapter 9 : Making capital investment decisions
FIN 323 : Chapter 9 : Making capital investment decisions FIN 323
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This 2 page Class Notes was uploaded by Leosinh on Tuesday April 26, 2016. The Class Notes belongs to FIN 323 at Marshall University taught by Dr. Shaorong Zhang in Spring 2016. Since its upload, it has received 10 views. For similar materials see Principles of Finance in Business at Marshall University.
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Date Created: 04/26/16
Chapter 9 : Making capital investment decisions Important 1) Relevant Cash Flows : include only cash flows that will only occur if the project is accepted ( incremental cash flows ) = corporate cash flow with the project – corporate cash flow without the project. 2) Stand-alone principle : The profit associated with the operation of a single project or division of a firm. When measuring standalone profit, values are only included if they are directly generated from the activities of the project or firm 3) Sunk cost : a cost that has already paid ( not a relevant cash flow) : always exclude sunk cost from your analysis. When making business or investment decisions, individuals and organizations typically look at the future costs that they may incur, by following a certain strategy. A company that has spent $5 million building a factory that is not yet complete, has to consider the $5 million sunk, since it cannot get the money back. It must decide whether continuing construction to complete the project will help the company regain the sunk cost, or whether it should walk away from the incomplete project 4) Opportunity cost : give up a benefit. 5) Pro Forma Statement and Cash Flow ( project the future operations ) a) Operating Cash Flow : OCF = EBIT + Depr – Taxes OCF = NI + Depr if no interest expense. b) Cash Flow from assets : CFFA = OCF – NCS – NWC 6) Scenario Analysis : Examines several possible situations : Worst case Base case or most likely case Best case Provide a range of possible outcomes Problems with Scenario Analysis : 7) Sensitivity Analysis : A sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price
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