competing project and investments. Each potential project's value should be estimated using a discounted cash flow (DCF) valuation, to find its net present value (NPV). It first applied to Corporate Finance by Joel Dean in 1951. This valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly
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required rate of return Net Present Value (NPV) The NPV is the sum of present values of all expected incremental cash flows if a project is undertaken. The discount rate used is the firm’s cost of capital. For a normal project with an initial cash outflow, flowed by a series of cash inflows (after tax), the NPV is given by:- For independent projects, the NPV decision rule is to accept projects with positive NPVs and to reject projects with negative NPVs. Simple Example Year 0 1 2 3 4 Project A
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Chapter 12 Cash Flow Estimation and Risk Analysis LEARNING OBJECTIVES After reading this chapter, students should be able to: • Discuss difficulties and relevant considerations in estimating net cash flows, and explain the four major ways that project cash flow differs from accounting income. • Define the following terms: relevant cash flow, incremental cash flow, sunk cost, opportunity cost, externalities, and cannibalization. • Identify the three categories to which incremental
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Caledonia Products Integrative Problem Adam Pugh, Estee Vargas-Nichols, Jenny Clark University of Phoenix FIN 370 Cassandra Ryder April 26, 2012 Caledonia Products Integrative Problem When companies are determining whether an investment must be undertaken, they decide if the investment will add to or detract from the value of the firm. There are several determining factors in evaluating an investment. These include project free cash flow versus accounting profits, incremental cash flows
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conditions of: 120 days Of all the options this one was the one that promised the highest degree of control over quality and delivery. 2.Use the projections provided in the case to compute incremental cash flows for the PCB project, as well as its NPV, IRR and payback period. The projections in the case shows Instruments’ expected expenditures on PCBs for the year 2004 to the year 2009 under the old sourcing strategy using contract manufacturers. These projections of expenditures include growth in
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partner expecting to reach sales at $10 million in 2009 and continue until 2013. Is this a good investment for Worldwide Paper Company to enter? The following analysis will consider following: net present value, NPV; the discount rate dividend model; the weighted average cost of capital, WACC; NPV with inflation. These combined calculations will assist Mr. Prescott in his decision on whether Worldwide Paper Company should move forward with the addition of a longwood woodyard for Blue Ridge Mill. Case
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CHAPTER 7—PROJECT CASH FLOWS AND RISK TRUE/FALSE 1. If an investment project makes use of land that the firm currently owns, the project should be charged with the opportunity cost of the land. 2. Net incremental operating cash flow is calculated by adding back the change in depreciation to the change in income after taxes. 3. A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected
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is to evaluate the costs of an investment to the initial capital to determine if the investment will generate more capital or cash flow for the company. The four capital budgeting techniques used by management are Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), and Payback method. SAC has developed new manufacturing techniques to offer special spark plugs for the auto racing industry. The company is considering purchasing new equipment to manufacture these new
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Lesson 4: | | Ex: 35 and wants to retire at 65Wants to be able to withdraw $90k on each bday for 20 years (65-85)First withdrawal on 66th bdayInvesting w/ 8% return Wants to make equal payments on each bdayWhat amount must she deposit annually 1) Find amount at age 66 that must be accumulated to withdraw 90k for 20 years at 8%. Ordinary annuity (cash flow occurring at end of each year) 2) Find the annual deposit amount that will accumulate to the amount found above for 30 years at 8%
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P2-3. LG 1: Income statement preparation a. |Cathy Chen, CPA | |Income Statement | |for the Year Ended December 31, 2009 | |Sales revenue | |$360,000 | |Less: Operating
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