Investment Appraisal - new areas Flashcards
What are relevent cash flows?
Future incremental cash flows with arise from a decision being taken
Things that are exempt from being relevent cash flows are?
Sunk costs (already happened)
Committed costs
Allocated and apportioned costs (no change in total value)
Non cash items
Book values
Finance costs e.g interest and dividends
What is the opportunity cost?
And is it a relevent cost
cash flow change if a unit of resource was used in a project rather than the next best alternative
i.e compare what one would receieve if they bought it , or sold it
yes it is relevent
Working capital is used in a calculation, because often when we invest in projects we require an investment into working capital (i.e inventory). What is the treatment of working capital in our NPV calc?
An investment in WC will initially require a cash outflow.
We include this in our total working capital calculation
If working capital changes over the project, we only include the incremental amounts of the increase in cash flow.
Hence under our total working capital we have a incremental working capital working
We then add the total of this increments to see the effect on NPV
What always equals 0 in our total WC calculation?
At the end of the project, the total WC calc will always equal 0
What would our incremental WC values be, if we invest 20,000 initially, and then 25,000 the following year, and then 15,000 the following?
Rememember we are looking at cash flows
Hence
T0 (25,000)
T1 (5000)
T2 10,000
Investment spending attracts tax deductable allowances (written down allowances) which are 18%. With regards to tax, allowances are given in full for every year of ownership, except for?
The year of disposal - here a balancing charge or balancing allowance arises
Explain the difference in tax treatment based on whether an asset was bought on 31 /12/X0 or 1/01/x1
If purchased at the last day of the year, the tax allowance is allowed for that year, hence an additional allowance is given
Tax is paid at the end of each year, based on?
(it is normally 25%)
Based on profits earned
Hence net of operating inflows and outflows for each T period will receive a 25% tax charge
After taxing our cash operating outflows and inflows, we then look at the relevent investments to have taken place and whether any allowances can be applied.
How would we show our written down allowances WDA within a working?
We would have to do this for each year, thus starting at T0 with the initial investment, applying the 18% reducing balance, and getting a resulting written down value. It is this amount that we would then apply another years 18% reducing balence, and deduct this etc.
For each allowance, we then apply the 25% charge to get the total tax WDA for each year.
How do we achieve the balancing allowance at the end?
We take our initial investment, apply the WDA to get the WDV. Keep doing this for the years applicable. In our final year we have the WDV from the year before, and given this is the final year, we do not have a WDA and instead will have the balancing allowance. We find this from deducting any proceeds from the WDV.
