財務管理ppt英文課件Chapter-12

1、Chapter 12Capital Budgeting and Estimating Cash Flows0Chapter ObjectivesThe Capital Budgeting ProcessGenerating Investment Project ProposalsEstimating Project “After-Tax Incremental Operating Cash Flows”1Copyright 2001 Prentice-Hall, Inc.What is Capital Budgeting?The process of identifying, analyzin

2、g, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.2Copyright 2001 Prentice-Hall, Inc.The Capital Budgeting ProcessGenerate investment proposals consistent with the firms strategic objectives.Estimate after-tax incremental operating cash flows for

3、the investment projects.Evaluate project incremental cash flows.Select projects based on a value-maximizing acceptance criterion.Reevaluate implemented investment projects continually and perform postaudits for completed projects.3Copyright 2001 Prentice-Hall, Inc.Classification of Investment Projec

4、t Proposals1. New products or expansion of existing products2. Replacement of existing equipment or buildings3. Research and development4. Exploration5. Other (e.g., safety or pollution related)4Copyright 2001 Prentice-Hall, Inc.Financial Cash FlowIn finance, the most important item that can be extr

5、acted from financial statements is the actual cash flow of the firm.Since there is no magic in finance, it must be the case that the cash from received from the firms assets must equal the cash flows to the firms creditors and stockholders.CF(A) CF(B) + CF(S) 5Copyright 2001 Prentice-Hall, Inc.Cash

6、Flow From AssetsThe total cash flow to debtholders and cash flow to shareholders. Consists of:operating cash flow - the cash flow that results from day-to-day activities of producing and selling;capital spending - the net spending on non-current assets; andadditions to net working capital - the amou

7、nt spent on net working capital.6Copyright 2001 Prentice-Hall, Inc.Estimating Cash FlowsComputing cash flows Operating Cash Flow (OCF) = Net income + depreciationCash Flow From Assets (CFFA) = OCF net capital spending (NCS) changes in net working capital (NWC)7Copyright 2001 Prentice-Hall, Inc. Pro

8、Forma Income StatementSales (50,000 units at $4.00/unit)$200,000Variable Costs ($2.50/unit)125,000Gross profit$ 75,000Fixed costs12,000Depreciation ($90,000 / 3)30,000EBIT$ 33,000Taxes (34%)11,220Net Income$ 21,780OCF=EBIT+Depreciation-Taxes=33,000+30,000-11,220= 51,7808Copyright 2001 Prentice-Hall,

9、 Inc.Original Investment (Year 0)Original capital investment for this project is $90,000The projects duration is three years.Investment will be depreciated straight-line (1/3 each year) for ease of calculation in this exampleIn addition, the project will tie up $20,000 of working capital, but this w

10、orking capital can be recovered (freed up) at the end of the project.9Copyright 2001 Prentice-Hall, Inc.Projected Total Cash FlowsYear0123OCF$51,780$51,780$51,780Change in NWC-$20,00020,000Capital Spending-$90,000 CFFA-$110,000$51,780$51,780$71,78010Copyright 2001 Prentice-Hall, Inc.Cash Flow From A

11、ssetsThe cash flow to debtholders includes any interest paid less the net new borrowing.Cash flow to creditors = Interest paid Net new borrowingThe cash flow to shareholders includes dividends paid out by a firm less net new equity raised.Cash flow to stockholders = Dividends paid Net new equity rai

12、sed11Copyright 2001 Prentice-Hall, Inc.Cash Flow vs. Accounting IncomeDiscount actual cash flows.Using accounting income, rather than cash flow, could lead to erroneous decisions.The realization principle is to recognize revenue at the time of sale.Costs are recorded based on the matching principle,

13、 that is, revenues are identified and costs associated with these revenues are matched and subsequently recorded.12Copyright 2001 Prentice-Hall, Inc.DifferencesThe figures on the profit and loss account will differ from actual cash inflows and outflows during a period due to:Revenues and costs being

14、 recorded when they are realized, not when they are received or paid.The existence of non-cash items such as depreciation.13Copyright 2001 Prentice-Hall, Inc.Relevant Cash FlowsThe cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is acc

15、epted.These cash flows are called incremental cash flows.The stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows.14Copyright 2001 Prentice-Hall, Inc.Incremental Cash FlowsIMPORTANTAsk yourself this question Would the cash fl

16、ow still exist if the project does not exist?If yes, do not include it in your analysis.If no, include it.15Copyright 2001 Prentice-Hall, Inc. Basic characteristics of relevant project flowsCash (not accounting income) flowsOperating (not financing) flowsAfter-tax flowsIncremental flowsEstimating Af

17、ter-Tax Incremental Cash Flows16Copyright 2001 Prentice-Hall, Inc.Principles that must be adhered to in the estimationIgnore sunk costsInclude opportunity costsInclude project-driven changes in working capital net of spontaneous changes in current liabilitiesInclude effects of inflationEstimating Af

18、ter-Tax Incremental Cash Flows17Copyright 2001 Prentice-Hall, Inc.Incremental Cash FlowsSunk costs are not relevantJust because “we have come this far” does not mean that we should continue to throw good money after bad.Opportunity costs do matter. Just because a project has a positive NPV that does

19、 not mean that it should also have automatic acceptance. Specifically if another project with a higher NPV would have to be passed up we should not proceed.18Copyright 2001 Prentice-Hall, Inc.Incremental Cash FlowsSide effects matter.Positive side effects benefits to other projectsNegative side effe

20、cts costs to other projectsErosion and cannibalism are both bad things. If our new product causes existing customers to demand less of current products, we need to recognize that.Incremental Cash Flowcash flow with projectcash flow without project=-19Copyright 2001 Prentice-Hall, Inc.Interest Expens

21、eLater chapters will deal with the impact that the amount of debt that a firm has in its capital structure has on firm value.For now, its enough to assume that the firms level of debt (hence interest expense) is independent of the project at hand.When valuing a project, ignore how the project is fin

22、anced. You must separate financing and investment decisions.20Copyright 2001 Prentice-Hall, Inc.Inflation RuleBe consistent in how you handle inflation!Use nominal interest rates to discount nominal cash flows.Use real interest rates to discount real cash flows.You will get the same results, whether

23、 you use nominal or real figures.21Copyright 2001 Prentice-Hall, Inc.Inflation ExampleYou own a lease that will cost you $8,000 next year, increasing at 3% a year (the forecasted inflation rate) for 3 additional years (4 years total). If discount rates are 10% what is the present value cost of the l

24、ease?22Copyright 2001 Prentice-Hall, Inc.InflationExample - nominal figuresYearCash FlowPV 10%1800028000 x1.03=82408000 x1.03=8487.208000 x1.03=8741.82 80001.1023=72727368099236376564597078429998240110848720110874182110234.$26,.23Copyright 2001 Prentice-Hall, Inc.InflationExample - real figures24Cop

25、yright 2001 Prentice-Hall, Inc.Tax Considerations and DepreciationDepreciation represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.Generally, profitable firms prefer to use an accelerated method for tax rep

26、orting purposes (MACRS).25Copyright 2001 Prentice-Hall, Inc.Everything else equal, the greater the depreciation charges, the lower the taxes paid by the firm.Depreciation is a noncash expense.Assets are depreciated (MACRS) on one of eight different property classes. Generally, the half-year conventi

27、on is used for MACRS.Depreciation and the MACRS Method26Copyright 2001 Prentice-Hall, Inc.MACRS Sample Schedule27Copyright 2001 Prentice-Hall, Inc.Depreciable BasisIn tax accounting, the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes.

28、 Depreciable Basis = Cost of Asset + Capitalized Expenditures Capitalized Expenditures are expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred. Such as Shipping and installation.28Copyright

29、2001 Prentice-Hall, Inc.Sale or Disposal of a Depreciable AssetGenerally, the sale of a “capital asset” (as defined by the IRS) generates a capital gain (asset sells for more than book value) or capital loss (asset sells for less than book value).Often historically, capital gains income has received

30、 more favorable U.S. tax treatment than operating income.29Copyright 2001 Prentice-Hall, Inc.Corporate Capital Gains / LossesCurrently, capital gains are taxed at ordinary income tax rates for corporations, or a maximum 35%.Capital losses are deductible only against capital gains.30Copyright 2001 Pr

31、entice-Hall, Inc.Calculating the Incremental Cash FlowsInitial cash outflow - the initial net cash investment.Interim incremental net cash flows - those net cash flows occurring after the initial cash investment but not including the final periods cash flow.Terminal-year incremental net cash flows -

32、 the final periods net cash flow.31Copyright 2001 Prentice-Hall, Inc.Initial Cash Outflowa) Cost of “new” assetsb)+ Capitalized expendituresc)+ (-) Increased (decreased) NWCd)- Net proceeds from sale of “old” asset(s) if replacemente)+ (-) Taxes (savings) due to the sale of “old” asset(s) if replace

33、mentf)= Initial cash outflow32Copyright 2001 Prentice-Hall, Inc.Incremental Cash Flowsa)Net incr. (decr.) in operating revenue less (plus) any net incr. (decr.) in operating expenses, excluding depr.b)- (+)Net incr. (decr.) in tax depreciationc)=Net change in income before taxesd)- (+)Net incr. (dec

34、r.) in taxese)=Net change in income after taxesf)+ (-)Net incr. (decr.) in tax depr. chargesg)=Incremental net cash flow for period33Copyright 2001 Prentice-Hall, Inc.Terminal-Year Incremental Cash Flowsa) Calculate the incremental net cash flow for the terminal periodb)+ (-)Salvage value (disposal/

35、reclamation costs) of any sold or disposed assetsc)- (+)Taxes (tax savings) due to asset sale or disposal of “new” assetsd)+ (-)Decreased (increased) level of “net” working capital e)=Terminal year incremental net cash flow34Copyright 2001 Prentice-Hall, Inc.Example of an Asset Expansion Project Exa

36、mple Basket Wonders (BW) is considering the purchase of a new basket weaving machine. The machine will cost $50,000 plus $20,000 for shipping and installation and falls under the 3-year MACRS class. NWC will rise by $5,000. Lisa Miller forecasts that revenues will increase by $110,000 for each of th

37、e next 4 years and will then be sold (scrapped) for $10,000 at the end of the fourth year, when the project ends. Operating costs will rise by $70,000 for each of the next four years. BW is in the 40% tax bracket.35Copyright 2001 Prentice-Hall, Inc.Initial Cash Outflow a) $50,000 b)+ 20,000 c)+ 5,00

38、0 d)- 0 (not a replacement) e)+ (-) 0 (not a replacement) f)= $75,000* Note that we have calculated this value as a “positive” because it is a cash OUTFLOW (negative).36Copyright 2001 Prentice-Hall, Inc.Incremental Cash Flows Year 1 Year 2 Year 3 Year 4a) $40,000 $40,000 $40,000 $40,000b)- 23,331 31

39、,115 10,367 5,187c)=$16,669 $ 8,885 $29,633 $34,813d)- 6,668 3,554 11,853 13,925e)=$10,001 $ 5,331 $17,780 $20,888f)+ 23,331 31,115 10,367 5,187g)=$33,332 $36,446 $28,147 $26,07537Copyright 2001 Prentice-Hall, Inc.Terminal-Year Incremental Cash Flowsa) $26,075The incremental cash flow from the previ

40、ous slide in Year 4.b)+ 10,000Salvage Value.c)- 4,000.40*($10,000 - 0) Note, the asset is fully depreciated at the end of Year 4.d)+ 5,000NWC - Project ends.e)=$37,075Terminal-year incremental cash flow.38Copyright 2001 Prentice-Hall, Inc.Summary of Project Net Cash FlowsAsset Expansion Year 0 Year

41、1 Year 2 Year 3 Year 4-$75,000* $33,332 $36,446 $28,147 $37,075* Notice again that this value is a negative cash flow as we calculated it as the initial cash OUTFLOW in slide 36.39Copyright 2001 Prentice-Hall, Inc.Example of an Asset Replacement Project Example Let us assume that previous asset expa

42、nsion project is actually an asset replacement project. The original basis of the machine was $30,000 and depreciated using straight-line over five years ($6,000 per year). The machine has two years of depreciation and four years of useful life remaining. BW can sell the current machine for $6,000. The new machine will not increase revenues (remain at $110,000) but it decreases operating expenses by $10,000 per year (old = $80,000). NWC will rise to $10,000 from $5,000 (old).40Copyright 2001 Prentice-Hall, Inc.