university_of_Saskatchewan公司财务导论(金融学)10汇.pptVIP

Fall 2003 COMM 203 Capital Budgeting Fundamental Principles of Project Evaluation Project evaluation - the application of one or more capital budgeting decision rules to estimated relevant project cash flows in order to make the investment decision. Fundamental Principles of Project Evaluation Relevant cash flows - the incremental cash flows associated with the decision to invest in a project. The incremental cash flows for project evaluation consist of any and all changes in the firm’s future cash flows that are a direct consequence of taking the project. Stand-alone principle - evaluation of a project based on the project’s incremental cash flows. Incremental Cash Flows Key issue: When is a cash flow incremental? Example: Preparing Pro Forma Statements Suppose we want to prepare a set of pro forma financial statements for a project for Norma Desmond Enterprises. We assume: 1. Sales of 10,000 units/year @ $5/unit. 2. Variable cost per unit is $3. Fixed costs are $5,000 per year. The project has no salvage value. Project life is 3 years. 3. Project cost is $21,000. Depreciation is 7,000/year. 4. Additional net working capital is $10,000. 5. The firm’s required return is 20%. The tax rate is 34%. Example: Preparing Pro Forma Statements (continued) Example: Preparing Pro Forma Statements (concluded) Example: Using Pro Formas for Project Evaluation A capital budgeting analysis. Project operating cash flow (OCF): Example: Using Pro Formas for Project Evaluation (continued) Project Cash Flows Example: Using Pro Formas for Project Evaluation (concluded) Capital Budgeting Evaluation: NPV = -$31,000 + $12,280/1.201 + $12,280/1.20 2 + $22,280/1.20 3= $655 IRR = 21% PBP = 2.3 years AAR = $5280/{(31,000 + 24,000 + 17,000 + 10,000)/4} = 25.76% Should the firm invest in this project? Why or why not? Yes -- the NPV 0, and the IRR required return Changes in Net Working Capital Income statements don’t reflect sales on credit costs paid later