Mod 12 Flashcards
After Tax Salvage Value (ATSV)
An estimate of an asset’s after tax value at the end of a project
Bottom up
An approach to calculating OCF
Start with net income at the bottom of the pro forma income statements, then add back any non cash items (ex depreciation) further up in the income statement
Capital budgeting
The process by which firms allocate their scarce capital for future long term projects
Cash flows from assets (CFFA)
Steam of cash inflows and outflows generated by the firm’s assets
Operating cash flows - change in net working capital - net capital spending at any point in time
Change in net working capital
Cash flows due to increases or decreases in net working capital
NWC increases when owners put money into the business to smooth over current accounts (pay payables while waiting to collect receivables)
Owners take the cash out when the project ends
Depreciation
Allocating the cost of a tangible asset over its useful life
Not a cash flow
Reduces taxes
Erosion
Cash flows of a new project that come at the expense of existing projects
Incremental cash flows
Any and all changes in the firm’s future cash flows that are a direct consequence of taking the project
IRR rule
If the IRR for a project is greater than the IRR for the next best investment, take the project
Modified accelerated cost recovery system
Depreciation method under US tax law
Allows for accelerated write off property under various classifications
Net capital spending
Cash flows that result from purchasing and selling a project’s long term assets (ex PPE)
NPV rule
If the PV of all cash inflows > PV of all cash outflows, accept the project
Operating cash flows
Cash generated by a project’s ongoing operations
Net income + depreciation
Payback period
Amount of time for an investment to generate cash flows sufficient to recover the initial cost
Payback rule
If a project’s payback period is less than the pre specified time limit, take the project
