Week 12 - Workshop Questions

Question 1

What Value should be recorded as the initial cost of a project for the use of land?

Answer 1

Only the valuation of the land should be recorded

Question 2

How much of future sales (next year), should be recorded as a side effect of the introduction of a new product?

Answer 2

Only the SIDE EFFECT of sales should be included (the increase of sales to existing products). Do not include the sales of the new product itself.

Question 3

What happens to inventory, accounts payable and accounts receivable at the start of a project?

Answer 3

Inventory - Increases (Buy stock)
Accounts payable - Increases (Borrow cash)
Accounts receivable - Decreases (Collect debt owed to you)

Question 4

What happens to inventory, accounts payable and accounts receivable at the end of a project?

Answer 4

Inventory - Decreases (Sale of stock)
Accounts Payable - Decreases (Pay back money owed by you)
Accounts Receivable - Increases

Question 5

What is the formula for ‘Incremental cash flows’? And What should be considered in the calculation of ‘Incremental Cash Flows’?

Answer 5

ICF = Revenues - Expenses - Initial cost

Question 6

When calculating the ‘Net Present Value’ of a project, How is Net Income calculated?

Answer 6

Sales 
COGS
Gross profit
Depreciation charge
EBIT
Tax
Net Income

Question 7

When calculating the Net Present value of a project, How is Free Cash Flow calculated?

Answer 7

Operating Cash flow (Gross profit less Tax)
Capital Expenditure (Initial Cost)
Change in Net Working Capital ( Increase or decrease needed year on year)
Free cash flow (OCF - Cap.Expenditure - Change in NWC)

Question 8

How is the ‘continuation valuation’ used in the calculation of the NVP of a project?

Answer 8

The continuation valuation is added to the last year cash flow and discounted at the appropriate rate.

Question 9

What is the NWC formula?

Answer 9

Cash + inventory + Accounts receivable - Accounts Payable

Question 10

What are the things to consider when working out the FCF at the end of a project?

Answer 10

• Do you receive the NWC back?
• Is there a return on capital expense? This sale needs to be discounted for tax
• Is the opportunity cost recovered?

Question 11

Under What circumstances is ‘deprecation’ added or not when calculating FCF?

Answer 11

Added when: FCF is being calculated from net income (Depreciation has been deducted)

Not Added when: FCF is being calculated from OFC

Question 12

If FCF is being calculated from OCF, is depreciation added or not?

Answer 12

When calculating FCF from OCF depreciation is not added

Question 13

When FCF is being calculated from Net Income, depreciation is…

Answer 13

When FCF is being calculated from Net income, depreciation is added