Ch 10- Marketing Cap Inv Decision Flashcards
Gross Margin- Depreciation
EBIT
When you are creating the financial model, you need to calculate the EBIT of every year
imagine if you have 20 years then you need a lot of EBITs- how to address this problem?
USE THE TAX SHIELD
PV CCA TS
Present value of the tax shield on cca
d= CCA rate
the last tern (SndTc/ (D+r) os equal to the salvage value
10.4 Example
TRICK ON THE EXAM: DELIVERY AND INSTALLATION COSTS, ARE THEY CAPITALIZED OR EXPENSED?
CAPITALIZE IT!!!!
How do we determine what is a relevant and irrelevant cash flow?
It has to incremental! meaning that these are CF that DEPEND on taking on the project :)
WE IGNORE THE CF THAT WOULD EXIST REGARDLESS OF US TAKING ON THE PROJECT OR NOT
What is the stand alone principle
HELPS US BASICALLY ANALYZE A PROJECT
Comparing the cash flow of firm to the cost of acquiring it on a small scale (hard to compute the cf of a huge firm before and after 1 project)
What is a sunk cost
a cost that has already been paid/incurred
it can not go away if we decide to say yes/no to a new project
-> THESE ARE NOT INCREMENETAL CASH FLOWS!!! WILL OCCUR NO ATTER WHAT SO EXCLUDE THEM
Opportunity cost
the cost of giving up another alternative!
firms might own certain equipment for a project, and thus they dont need to buy any new one- so is their equipment free? no! they could have been used elsewhere but they arent
also, how should the opp cost be priced? = the current selling price net of selling costs
Side Effects:
-erosion
-benefits
when pursuing a project nefatively impacts aother projects cash flows
when it helps you make more cash flows
Do we care about NWC in investing projects?
YES! because we need the cash on hand to do the actual intiial investmetn and also for any costs that come up
Financing costs- consideratin for investing
we do not consider this because wec are about the CF generated by the assets
***INTEREST PAID IS A BGI COMPONENT OF CF TO CREDITORS NOT CF FROM ASSETS
inflaiton needs to be ocnsidered too
word
When do we measure cf
when it actually occurs not when it arises in the acct sense
Do we care about pre tax or after tax cf
after tax!!!!
What is Pro Forma FS
projected FS
Simplifying asusmptions in PRO forma FS
- straight line depreciaiton not CCA
- full year depreciaiton = taken in first year
- projects MV = BV when scrapped
What do you need to create pro forma FS
estimates of quantities (unit sales, sell price per unit, vbl cost per unit, total fixed costs)
- need to know total investment required
(including any investnment in NWC)
How to make Pro Forma FS
Sales
-Vbl Costs
=Gross Profit
Fixed Costs
-Depreciation
=EBIT
-Taxes
=NI
**no interest dediuctions bc interest paid is a cf to creditors
How to get a projects cash flows
based on OCF formula
PCF= ProjectOperating CF- ProjectAddtoNWC - ProjectCapSpending