Capital Budgeting

Question 1

Expansion project initial outlay

Answer 1

FCInv + NWCInv

NWCInv = change in non-cash current assets - change in non-debt liabilities

Question 2

Expansion project incremental operating CFs

Answer 2

=(Sales - costs - depreciation)(1-T) + D

Question 3

Expansion project terminal year after-tax non-operating CFs (TNOCF)

Answer 3

= Proceeds from sale + NWCInv - T(Proceeds - book val)

Question 4

Replacement project initial outlay

Answer 4

= FCInv + WCInv - proceeds from sale of old + T(proceeds old - book val old)

Question 5

Replacement project incremental operating CFs

Answer 5

= (deltaS - deltaC)(1-T) + deltaD*T

Question 6

Replacement project TNOCF

Answer 6

= (Proceeds from sale new - proceeds from sale old) + NWCInv - T[(proceeds new - book val new)(proceeds old - book val old)]

Question 7

Economic income

Answer 7

Equal to the after tax CF plus the change in the investment’s market value
= CF + (ending market value - beginning market value)
= CF - economic depreciation

Question 8

Economic profit

Answer 8

= NOPAT - $WACC

Reflects income earned by all capital holders and is therefore discounted at WACC to determine MVA or NPV of investment

Question 9

Residual income

Answer 9

Focused on returns to equity holders, calculated as net income minus equity charge. Discounted at required rate of return in equity

Question 10

Claims valuation

Answer 10

Separates CFs based on the claims that equity holders and debt holders have on the asset. CFs to debt holders discounted at cost of debt and CFs to equity holders discounted at cost of equity. PV of each set of CFs added together to determine the value of the company