Lecture 1 Flashcards
What is the formula for a cash inflow?
Sales- Increase in accounts receivable
What is the formula for cash outflow?
COGS+ increase in inventory - increase in accounts payable
What does a positive amount of AR+Inv- AP mean?
An additional investment in working capital
What will happen to working capital at the end of the project?
All working capital is recovered (as a cash inflow) at the end of the projects life
Are opportunity costs included?
Yes- op cost is the cash it could generated for the company if the project rejected or the item sold
Are sunk costs included?
No- ignore
Are the existing overhead allocations included?
No- ignore current allocation and only include if extra overhead expenses are generated by the project
What are nominal and real cash flows?
Nominal cash flows = true value without adjustments for inflation (actual $ received)
Real cash flows: adjustments are made for inflation
Is the cost of debt included?
No - if particularly financed by debt- neither subtracted proceeds from required investment nor interest and principal repayment
How are finance costs recognised?
In the discount rate instead
How is depreciation included?
An allowable deduction from profit, however must be added back after NPAT determined (non-cash)
What is included in the capital cash flow?
1) Cost of new machine
2) Proceeds from sale of old machine
3) Tax effect of sale (book value- salvage value) x tax rate
4) Increased requirements in WC (inventory)
5) Opportunity costs (for example, warehouse potential sale price)
What is included in the operating cash flow
1) Incremental revenue
2) Incremental costs
3) Incremental depreciation
4) Incremental overhead increase if caused by project
4) PBT
5) PAT
6) Add back deprecation
How do we calculate the NPV once we have the cash inflows/ outflows each year
Discount
P(1.r)^-n
How can the NPV be used to decide which project to proceed with?
Choose the project with the higher NPV
When will using the EAC be useful?
If choices have an impact on future opportunities, may require conversion into equivalent annual cash flow
What is the formula for converting the NPV into EAC?
NPV/ Annuity factor
(1-(1+r)^-n/r
What is the formula for converting the EAC into a perpetuity to convert into NPV?
EAC amount/ rate of return required
What is the formula for discounting the NPV of an annuity?
Amount* PVAF
How do we convert annuity amounts to NPV?
Annuity/ rate
