Week11 Flashcards
(17 cards)
Where does the company’s cash flow come from
the company’s projects
what is the definition of incremental cash flows
they must occur directly from taking on the project
what are characteristics of these cash flows
1) they must be estimated over the life of the project, 2) and they must be measured at the point in time which the cash flows occur.
3) these cash flows must be unique to the project, and 4) the project must also be evaluated on a standalone basis.
5) occur directly from taking on project
are sunk costs considered incremental cash flows
NO. even if u dont take on the project, you will still incur them. not related to the decision of taking on the project. sunk costs occur before you think about whether you want to take on the project. 1) not incurred directly from taking on project 2) doesnt estimate over the life of project
are opp costs considered incremental cash flows
yes. the most valuable alternative given up if a particular investment is taken. eg: sale of asset, rent out asset, use somewhere else in business
are financing costts considered incremental cash flows
NO.
1) cash flows to investors, not to project. –> dont occur directly from taking on project
2) not unique to the project
financing costs accounted for in project’s cost of capital
is depreciation considered an incremental cash flow
NO. we count depreciation over the economic life of the asset, not the project. depreceiation is not estimated over the ECONOMIC life of the project
is change in net working capital incremental cash flows
yes. nwc = ar + inventory - ap. incremental/net working capital is change in working capital required to sustain the increase (or decrease) in
business activities from one year to the next. it is directly incurred if you take on the project.
When incremental (net) working capital is positive, excluding working capital will overstate project cash flows and the project look more valuable than it is. Why?
if your net working capital is positive, your profit is artificially increased when you exclude it. when you double your revenue, you would think you have increased your profit, but actually its still the same. If IncNWC > 0, there is a cash outflow, excluding IncNWC
will omit money invested and therefore overstate cash flows
if you reduce working capital, will you increase or decrease project cash flows
increase
what are some of the initial investment costs
cost of assets, set up costs, additional working capital, tax credits, sale of existing assets
what are pro forma statements
financial statements of
forecasted project operating cash flows
do the cogs include depreciation
yes
cogs + opex =
variable costs + fixed costs + depreciation
how do you get operating cash flow (incremental project cash flows)
ebit - tax + depreciation - incremental capex - incremental net working capital
how do you calculate terminal cash flow in present dollars
last cash flow raised to the power of the last year you consider in your analysis
why do we assume that projects have a finite life time
cos projects get outdated over time
