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Chapter 9

This lecture provides an overview of incremental cash flows, the stand-alone principle, and pro forma financial statements in the context of capital investment decisions. A current news story will be used to frame the material covered.

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Chapter 9

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  1. Chapter 9 Making Capital Investment Decisions

  2. Overview of Lecture

  3. Corporate Finance in the News Insert a current news story here to frame the material you will cover in the lecture.

  4. Incremental Cash Flows

  5. The Stand-Alone Principal

  6. Incremental Cash Flows

  7. Incremental Cash Flows

  8. Incremental Cash Flows

  9. Pro Forma Financial Statements

  10. Pro Forma Financial Statements

  11. Pro Forma Financial Statements

  12. Pro Forma Financial Statements

  13. Project Cash Flows

  14. Project Operating Cash Flow (OCF)

  15. Project Operating Cash Flow

  16. Project Value

  17. A Closer Look at Net Working Capital

  18. A Closer Look at Net Working Capital

  19. A Closer Look at Net Working Capital

  20. Example 9.1Cash Collections and Costs

  21. Example 9.1Cash Collections and Costs

  22. Depreciation

  23. Depreciation

  24. Depreciation • 20% Reducing Balance:

  25. Example 9.2Reducing Balance Depreciation

  26. Example 9.2Reducing Balance Depreciation

  27. Example: Majestic Mulch and Compost Ltd (MMC)

  28. Example: Majestic Mulch and Compost Ltd (MMC)

  29. Example: Majestic Mulch and Compost Ltd (MMC)

  30. Example: Majestic Mulch and Compost Ltd (MMC)

  31. Example: Majestic Mulch and Compost Ltd (MMC)

  32. Example: Majestic Mulch and Compost Ltd (MMC)

  33. Example: Majestic Mulch and Compost Ltd (MMC)

  34. Example: Majestic Mulch and Compost Ltd (MMC)

  35. Alternative Definitions of Operating Cash Flow

  36. Special Cases of DCF Analysis

  37. Example 9.3To Buy or Not to Buy

  38. Example 9.3To Buy or Not to Buy

  39. Example 9.3To Buy or Not to Buy At 16 per cent, the NPV is €16,157, so the investment is not attractive. After some trial and error, we find that the NPV is zero when the discount rate is 10.62 per cent, so the IRR on this investment is about 10.6 per cent.

  40. Equivalent Annual Cost (EAC)

  41. Investments of Unequal Lives:The Equivalent Annual Cost Method

  42. Investments of Unequal Lives: The Equivalent Annual Cost Method • Assuming a discount rate of 10%, NPV is: • What is problematic about this analysis?

  43. Investments of Unequal Lives:The Equivalent Annual Cost Method

  44. Investments of Unequal Lives: The Equivalent Annual Cost Method

  45. Investments of Unequal Lives: The Equivalent Annual Cost Method • Machine A:

  46. Investments of Unequal Lives:The Equivalent Annual Cost Method • Machine B:

  47. Investments of Unequal Lives: The Equivalent Annual Cost Method Choose Machine B

  48. Example 9.4Equivalent Annual Costs

  49. Example 9.4Equivalent Annual Costs

  50. Example 9.4Equivalent Annual Costs

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