Lecture 1- Actual

Question 1

What is included in the capital cash flow?

Answer 1

1) Purchase of new equipment
2) Sale of old equipment
3) Tax effect of sales (book value- sales price) * tax rate
4) Working capital (Add back at end of project)
5) Opportunity cost
= Capital cash flow

Question 2

What is included in the operating cash flow?

Answer 2

1) Revenue
2) Expenses
3) Depreciation
4) Net cash flow before tax
5) Tax amount
6) Profit after tax
7) Add back: Depreciation
= Operating cash flow

Question 3

How is the cash flow NPV calculated

Answer 3

Calculate separately for each year

= Cash flow (1+r)-n

Question 4

What are the two steps in calculating EAC?

Answer 4

1) Determine NPV
Amount*[PVAF]
2) Calculate EAC
Amount/[PVAF]

Question 5

How do we work out investment timing problems?

Answer 5

1) Determine the EAC of the new asset

2) Calculate the expected current cash flows for each scenario (use perpetuity for EAC)

Question 6

What is the EAC perpetuity formula? When will this amount be calculated?

Answer 6

= EAC/ cost of capital

- Amount calculated one period before perpetuity payment (THEREFORE BE CAREFUL WITH TIMING)