Flashcards in Capital Budgeting Deck (10):
Process for evaluating and selecting the long-term investment projects of the firm
Cash Flow Effects: Direct effect
Pays out cash & receives cash
Cash Flow effect: Indirect effect
Net proceeds on sale of old reduces cost of new
Cash Flow: Depreciation
Depreciation reduces the amount of taxable income.
Depr. X Tax Rate= $ that you are saving
Buying Working Capital
Treated as a cash outflow, you are practically buying assets
Reduced Working Capital requirements
You are selling an asset. that is cash in flow
Disposal of a replaced asset
Offsets the cost of the new asset.
Selling Price- Net Book Value= Gain or Loss
If you sell at a gain. You have to subtract the tax out of the gain.
-Gain X T out
+ Loss X T In
Net Initial cost of an asset
Invoice+ Shipping+ Install = Out
+ Increase in Working Capital= Out
-Net Proceeds sale of old asset= Inflow
= Net Inflow
What is a limitation of the profitability Index?
It requires detailed long-term forecasts of the project's cash flows.