4 Flashcards
Wat zijn incremental cash flows
Additional cash flows that occur only as a result of taking on the project
Welke 4 incremental cashflows zijn er
Erosion
Spillover effects
Salvage
Opportunity costs
Erosion – demand for a new product cuts into sales of existing products (e.g., new gaming console);
Spillover effects – the project may help the firm’s existing business;
Salvage – when a project comes to an end, assets can be sold or redeployed elsewhere in the business;
Opportunity costs – undertaking the project may require giving up benefits (e.g., piece of land)
Wat is free cash flow
Cash that the firm is free to distribute to creditors and stockholders
Wat zijn non incremental cash flows
Sunk costs
Overhead costs
Financing costs
Sunk cost – past and irreversible outflows (i.e., costs that have been already paid) that cannotbe affected by the decision to accept or reject the project (e.g., already conducted R&D, consulting services);
Overhead cost – expenses associated with running a business that cannot be affected by the decision to accept or reject the project (e.g., rent, utilities, supervisory salaries) → include only the ‘extra’ expenses that would result from the project;
Financing cost – always view the project as if all-equity-financed (e.g., exclude interest paid)
Wat is project free cash flow
The incremental effect of a project on the firm’s available cash independent from any financing decision
How do you calculate project free cash flow
Project Free Cash Flow =
Operating Cash Flow (OCF) – Capital Investment – Investment in Working Capital
Hoe bereken je operating cash flow
The Top-Down Approach (most direct):
Operating Cash Flow = Revenues – Expenses – Taxes
The Bottom-Up Approach (indirect):
Operating Cash Flow = Net Income + Depreciation
Wat is capital expenditure (Capex)
Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment
Negative cashflow because it is paid upfront
Hoe bereken je Capex
CapEx = ∆PP&E + Current Depreciation
∆PP&E= change in PPE
Wat betekent salavge value
When an asset is completely depriciated but it still hass some value
Positive cash flow
Hoe gaan investments in working capital aan het begin midden en eind van een project
At the beginning of the project’s life:
Investment in inventories (of raw materials or finished products) – negative CF.
Working capital changes during the life of the project!
Increase in accounts receivable – negative CF;
Increase in accounts payable – positive CF.
Investments in net working capital are recovered at the end of the project:
Inventories are sold and accounts receivable collected – positive CF
Hoe evaluate je NPV estimates
Scenario analysis – consider a number of (typically five) possible alternative scenarios (in terms of input variables);
Sensitivity analysis – a variation of scenario analysis that probes the sensitivity of the NPV estimate with respect to a single input variable (e.g., sales volume), while all other variables are kept constant;
Simulation analysis – considers a very large number of scenarios by leveraging technology;
Break-even analysis – determines what level of sales are necessary to cover the company’s total fixed costs (the margin of safety)
Wat zijn challenges bij investment decisions
Challenge I: The investment timing decision (Should we invest now or later?)
Challenge II: The choice between long- and short-lived equipment
Challenge III: The replacement problem (Should an existing machine be replaced?)
Hoe werkt de investment timing decision
A positive NPV project may be more valuable if undertaken in the future:
1. Examine alternative start dates for the investment;
2. Calculate the net future value at each of these dates;
3. Discount these net future values back to present.
Hoe werkt de choice between long- and short-lived equipment
EAC= PV of all cashflows/ annuity factor
The lowest cost is better
