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FNCE317 > Ch 10- Marketing Cap Inv Decision > Flashcards

Ch 10- Marketing Cap Inv Decision Flashcards

1
Q

Gross Margin- Depreciation

A

EBIT

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2
Q

When you are creating the financial model, you need to calculate the EBIT of every year

A

imagine if you have 20 years then you need a lot of EBITs- how to address this problem?

USE THE TAX SHIELD

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3
Q

PV CCA TS

Present value of the tax shield on cca

A

d= CCA rate

the last tern (SndTc/ (D+r) os equal to the salvage value

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4
Q

10.4 Example

A
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5
Q

TRICK ON THE EXAM: DELIVERY AND INSTALLATION COSTS, ARE THEY CAPITALIZED OR EXPENSED?

A

CAPITALIZE IT!!!!

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6
Q

How do we determine what is a relevant and irrelevant cash flow?

A

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

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7
Q

What is the stand alone principle

A

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)

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8
Q

What is a sunk cost

A

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

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9
Q

Opportunity cost

A

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

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10
Q

Side Effects:
-erosion
-benefits

A

when pursuing a project nefatively impacts aother projects cash flows

when it helps you make more cash flows

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11
Q

Do we care about NWC in investing projects?

A

YES! because we need the cash on hand to do the actual intiial investmetn and also for any costs that come up

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12
Q

Financing costs- consideratin for investing

A

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

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13
Q

inflaiton needs to be ocnsidered too

A

word

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14
Q

When do we measure cf

A

when it actually occurs not when it arises in the acct sense

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15
Q

Do we care about pre tax or after tax cf

A

after tax!!!!

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16
Q

What is Pro Forma FS

A

projected FS

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17
Q

Simplifying asusmptions in PRO forma FS

A
  1. straight line depreciaiton not CCA
  2. full year depreciaiton = taken in first year
  3. projects MV = BV when scrapped
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18
Q

What do you need to create pro forma FS

A

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)
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19
Q

How to make Pro Forma FS

A

Sales
-Vbl Costs
=Gross Profit

Fixed Costs
-Depreciation
=EBIT

-Taxes
=NI

**no interest dediuctions bc interest paid is a cf to creditors

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20
Q

How to get a projects cash flows

A

based on OCF formula

PCF= ProjectOperating CF- ProjectAddtoNWC - ProjectCapSpending

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21
Q

How to calculate Project Operating Cash Flow

A

Use projects info

OCF= EBIT+DEP-taxes

22
Q

How to get Project NWC and Project Cap Spending

23
Q

change in nwc

what is net cash flow

A

Change in CA -Change in CL

S - C - Change in NWC

24
Q

When you have an investmetni n net working capital, what is the one thing to know about it?

A

IT MUST BE RECOVERED WHOLLY

25
What is Cash Inflow
Sales- Increase in A/R A/r is a non cash expense bestie
26
How to break down a lot of information and see if you should proceed with a project?
1. Calculate projected sales 2. Revenue, Variable Costs, Fixed Costs, CCA/Dep, EBIT, Taxes, NI table -> Make sure to get CCA correctly 3. Calc OCF (EBIT+CCA-Taxes for EVERY YEAR) 4. Calc NWC for every year (Initial NWC for Y1, NWC increases yearly, NWC recovery in Ylast) 5. Look at sale price of equipment, is it >Adj Cost or
27
Wat is an increase in NWC
Cash outflow
28
What is a decrease in NWC
Cash inglow (- sign as cash is returning to the firm)
29
4 ways of calculating OCF
1. REGULAR: OCF= EBIT+DEP-TAX 2. Bottom Up: OCF= NI+Dep -start w bottom line (N1) and add back -only correct when no int expenses subtracted in calc of NI 3. Top Down: OCF= Sales-Costs-Taxes - Start at top of SOCI, leave out non cash 4. Tax shield approach: OCF= (Sales-Costs)(1-Tax)+Dep*Tax ALL correct whiever is more ocnvenitnet use it
30
Why do we like tax shield
we always need CCA, ebit, and NI figures and this is most efficient
31
How to Apply Tax Shield approach?
1. find the PV of each source of cash flows and add them 2.(S-C)(1-Tc)+DTc
32
When to use the PV of Tax shield on CCA and when to not use it?
This makes it easier you dont even gotta calculate the yearly CCA ->MAIN IDEA: tax shields from CCA continue in perpetuity as long as there are assets remaining in CCA class (As long as its open) BUT YOU CAN NOT USE THIS FORMULA IF YK THE ASSET POOL WILL BE CLOSED AT THE END OF THE PROJECTS LIFE -> if this is the case, annual CCA should be calculated to get the UCC and find if terminal loss or CCA recapture
33
Why is the salvage value diff from UCC
There is a slight difference between this calculation for the present value of the tax shield on CCA and what we got in Table 10.12 by adding the tax shields over the project life. The difference arises whenever the salvage value of the asset differs from its UCC. When an asset is sold, the difference between its salvage value and ending UCC is not realized as gain or loss on the statement of comprehensive income immediately. It remains in the asset pool and continues to create CCA tax shields for as long as the pool exists. Hence, the formula solution is more accurate as it takes into account the future CCA on this difference
34
PVCCATS FORMULA
35
4 special cases of DCF analysis
1. investments for improving efficieny and cutting costs 2. analyzing replacement deciisions 3. choosingn b/w equipment w diff economic lives 4. when a firm is competing bids
36
Type 1 case of DCF Analysis: Cost cutting proposals
Issue: is the cost savings enough to justify expense? How to solve? - find incremental CF (make a table, what is the first investment, is there NWC consequences?, what are the effects on operating CF) - get PV CCATS - get PVCASH flows - get the NPV THIS IS THE BASIC ONE
37
Type 2 case of DCF Analysis: Replacing an Asset
REPLACING ASSETS! LOOK AT TABLE
38
How to know if we should include the cf or not?
Ask the question, will this cash flow occur or not occur ONLY if we accept the project? YES= include it Part of it=include only the part that will occur
39
Why do we have to consider changes in NWC separtely
GAAP! record sales when made not when cash recievied and also we nee to buy inventory to support sales evn though we dont have the cash yet
40
What is the depreciation tax shield
D*T (dep expense * marginal tax rate)
41
Type 3 case of DCF Analysis: evaluating equipment w diff lives
42
Setting the bid pirce
43
what is net working capital at its most basic
this is the cash in the till
44
when are taxes deducted
before cash flows
45
financing costs are not included in net working capital
!
46
what are the two things we spend money on in a project?
initial fixed assets + net working cpaital investement = total outflow we recover investment in net working cpaital in our last year
47
how to measure cash in? how to measure cash out? total cash collections
sales - a/r (non cash) costs - inventories decrease + payables decreasing total cash collections: cash in-cash out
48
an increase in NWC is
cash outflow
49
a decrease in NWC is
cash inflow
50
cash outflow
costs - increase in a/p + increase in inventory
51

FNCE317 (21 decks)

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