Chapter 8. Using Discounted Cash Flow Analysis to Make Investment Decisions. Topics Covered. Discounted Cash Flows, Not Profits Incremental Cash Flows (Ping King Example) Treatment of Inflation Separate Investment & Financing Decisions Calculating Cash Flows Wednesday Example: TBA.
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Chapter 8
Using Discounted Cash Flow Analysis to Make Investment Decisions
Incremental Cash Flow
cash flow with project
cash flow without project

=
IMPORTANT
Ask yourself this question
Would the cash flow still exist if the project does not exist?
Year0123
Sales640096004860
WC need6409604860
WC Chg. 640320(474)(486)
Year123
Unit Sales10,00015,0009,000
$/Unit$640$640$540
VC/Unit$350$350$350
Sales($000)6,4009,6004,860
Variable Costs3,5005,2503,150
Fixed Costs 300 300 300
Depreciation 900 900 900
Pretax Profit1,7003,150 510
Tax(40%) 6801,260 204
Net Profit1,0201,890 306
+Depreciation 900 900 900
Operating Cash Flow1,9202,7901,206
Year0123
Cap Inv(4500)1200
WC Inv (640) (320) 474 486
Oper CF192027901206
Total CF(5140)160032642892
CF0C01C02C03
NPV at 18% = 320.247 or $320,247
IRR = 21.5%
YearOrig 1ChangeNew 1
Revenue($000)6,400(1,000)5,400
Variable Costs3,500 (500)3,000
Fixed Costs 300 300
Depreciation 900 900
Pretax Profit1,700(500)1,200
Tax(40%) 680(200) 480
Net Profit1,020(300) 720
+Depreciation 900 900
Oper Cash Flow1,920(300)1,620
INFLATION RULE
Dep Diff in PV of
YearDep%M Dep SL DepDiff TaxShd TaxShd
120.00 900,000900,0000 00
232.00 1,440,000900,000540,000 216,000 155,128
319.20864,000900,000(36,000) (14,400) (8,764)
411.52518,400900,000 146,364
511.52518,400900,000
6 5.76259,200
Year123
Unit Sales10,00015,0009,000
$/Unit$640$640$540
VC/Unit$350$350$350
Sales($000)6,4009,6004,860
Variable Costs3,5005,2503,150
Fixed Costs 300 300 300
Depreciation 9001,440 864
Pretax Profit1,7002,610 546
Tax(40%) 6801,044 218
Net Profit1,0201,566 328
+Depreciation 9001,440 864
Operating Cash Flow1,9203,0061,192
WC Cash Flow (320) 474 486
AfterTax SV 998
Total Cash Flow1,6003,4802,676
Initial CF (T=0) = 5140
NPV at 18% = $343,910 vs. $320,247 under straightline depreciation