Unit 5 - Evaluating Investment Opportunities and Stock Valuation Flashcards
Principle 1
Record cash flows when the money actually moves, not when the accountant using accrual concepts says they occur
Principle 2
Imagine two worlds, one in which the investment is made and one in which it is rejected. All cash flows that are different in these two worlds are relevant to the decision, and those that are the same are irrelevant.
Sunk Costs
Not relevant for present decision
Test Marketing Costs
Marketing research expenses expanded
Erosion Costs
Cash flow transferred to a new project from sales and customers of other products of the firm
Opportunity Costs
Lost revenues from alternative uses of the asset
Depreciation
Non-Cash expense. Add depreciation back to income after tax to calculate the investment’s after-tax cash flow (ATCF)
ATCF =
(Revenue - Costs - Depreciation) (1 - Tax) + Depreciation
Working Capital (Def)
Changes that are the result of an investment decision are relevant to the decision.
- Beginning of project - Cash outflows.
- End of project- Cash inflows
Factors to Consider when making cash flow estimates
Price, Volume Variable Costs Fixed Costs Capital Expenditure Working Capital
Price/Volume
- Competition from existing products
- Competition from technological advances
- Values to customer
Variable Costs
- Labor, Material, Energy
Fixed Costs
- Marketing (sales, advertising)
- Information Technology
- Account Management
Capital Expenditure
Property, Plant & Equipment
Working Capital (Types)
- Inventory
- Accounts Receivable
- Accounts Payable
Nominal Return
Percentage change in the amount of money you have
