公司理财(罗斯)第7章(英文)

Recall that when the project winds down, we enjoy a return of net working capital.
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The Tuft Company is generating cash flow of $333,000 per year. If they invest in a new press, they expect to increase their cash flow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider the A) press cost of $250,000 and total cash flow of $400,000 per year. B) press cost of $250,000 and incremental cash flow of $67,000 per year. C) current cash flow of $333,000 and the cost of $250,000 D) opportunity cost of the facility of $333,000. E) None of the above.
7.5 Investments of Unequal Lives: The Equivalent Annual Cost Method 7.6 Summary and Conclusions
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CHAPTER
7
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Net Present Value and Capital Budgeting
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Cash Flows—Not Accounting Earnings
Consider depreciation expense. You never write a check made out to ―depreciation‖. Much of the work in evaluating a project lies in taking accounting numbers and generating cash flows.
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Opportunity costs do matter. If the asset is used in a new project, potential revenues from alternative uses are lost. These lost revenues are called opportunity cost
Recall that: Operating Cash Flow = EBIT – Taxes + Depreciation
Net Capital Spending
Don’t forget salvage value (after tax, of course).
Changes in Net Working Capital
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7.2 The Baldwin Company: An Example(p180-182)
Costs of test marketing (already spent): $250,000. Current market value of proposed factory site (which we own): $150,000. Cost of bowling ball machine: $100,000 (depreciated according to ACRS 5-year life). Production (in units) by year during 5-year life of the machine: 5,000, 8,000, 12,000, 10,000, 6,000. Price during first year is $20; price increases 2% per year thereafter. Production costs during first year are $10 per unit and increase 10% per year thereafter. Annual inflation rate: 5% Working Capital: initially $10,000 changes with sales.
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Incremental Cash Flows
Sunk costs are not relevant
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7.1 Incremental Cash Flows
We first go over the concept of incremental cash flows. The easiest way to determine whether a cash flow item is incremental is by asking two questions: What will this cash flow be with the project? What will this cash flow be without the project? If the answers differ then this cash flow item is incremental, otherwise, it is irrelevant. Cash flows matter—not accounting earnings. Sunk costs don’t matter. Incremental cash flows matter. Opportunity costs matter. Side effects like cannibalism and erosion matter. Taxes matter: we want incremental after-tax cash flows. Inflation McGraw-Hill/Irwin matters. © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
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Estimating Cash Flows
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Interest Expense
Later 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, it’s enough to assume that the firm’s level of debt (hence interest expense) is independent of the project at hand.
A sunk cost is a cost that has already occurred. Because sunk costs are in the past, they cannot be changed by the decision to accept or reject the project. Just because ―we have come this far‖ does not mean that we should continue to throw good money after bad.
Chapter Outline
7.1 Incremental Cash Flows