【正文】 and depreciation = $250,000/5 = $50,000 per year 4. We can sell the equipment in 3 years for half its original cost: $125,000. The asset pool is then closed. Fall 2021 COMM 203 59 Another Example: Setting the Bid Price (continued) 5. The aftertax salvage value equals the cash in from the sale of the equipment, less the cash out due to the increase in our tax liability associated with the sale of the equipment for more than its book value: Book value at end of 3 years = $250,000 50,000(3) = $100,000 Book gain from sale = $125,000 100,000 = $25,000 Net cash flow = $125,000 25,000(.39) = $115,250 6. The project requires investment in working capital of $60,000. 7. Required return = 16%。 straight line depreciation to $0。 Annual sales = $100。 project cost = $60。Capital Budgeting Fall 2021 COMM 203 2 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. Fall 2021 COMM 203 3 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. ? Standalone principle evaluation of a project based on the project’s incremental cash flows. Fall 2021 COMM 203 4 Incremental Cash Flows ? Key issue: When is a cash flow incremental? ? Terminology A. Sunk costs B. Opportunity costs C. Side effects D. Net working capital E. Financing costs F. Inflation G. Government Intervention H. Other issues Fall 2021 COMM 203 5 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 working capital is $10,000. 5. The firm’s required return is 20%. The tax rate is 34%. Fall 2021 COMM 203 6 Example: Preparing Pro Forma Statements (continued) S a l e s $ 5 0 , 0 0 0V a r . c o s t s 3 0 , 0 0 0$ 2 0 , 0 0 0F i x e d c o s t s 5 , 0 0 0D e p r e c i a t i o n 7 , 0 0 0E B I T $ 8 , 0 0 0T a x e s ( 3 4 % ) 2 , 7 2 0Ne t i n c o m e $ 5 , 2 8 0P r o F o r m a F in a n c ia l S t a t e m e n t sP r o j e c t e d I n c o m e S t a t e m e n t s Fall 2021 COMM 203 7 Example: Preparing Pro Forma Statements (concluded) 0 1 2 3N W C $ 1 0 , 0 0 0 $ 1 0 , 0 0 0 $ 1 0 , 0 0 0 $ 1 0 , 0 0 0N F A 2 1 , 0 0 0 1 4 , 0 0 0 7 , 0 0 0 0T o t a l $ 3 1 , 0 0 0 $ 2 4 , 0 0 0 $ 1 7 , 0 0 0 $ 1 0 , 0 0 0P r o j e c t e d B a l a n c e S h e e tFall 2021 COMM 203 8 Example: Using Pro Formas for Project Evaluation ? A capital budgeting analysis. Project operating cash flow (OCF): E B I T $ 8 , 0 0 0D e p re c i a t i o n 7 , 0 0 0T a x e s 2 , 7 2 0O C F $ 1 2 , 2 8 0Fall 2021 COMM 203 9 Example: Using Pro Formas for Project Evaluation (continued) ? Project Cash Flows 0 1 2 3O C F $ 1 2 , 2 8 0 $ 1 2 , 2 8 0 $ 1 2 , 2 8 0C h g . NW C 1 0 , 0 0 0 1 0 , 0 0 0C a p . S p . 2 1 , 0 0 0T o t a l 3 1 , 0 0 0 $ 1 2 , 2 8 0 $ 1 2 , 2 8 0 $ 2 2 , 2 8 0Fall 2021 COMM 203 10 Example: Using Pro Formas for Project Evaluation (concluded) ? Capital Budgeting Evaluation: NPV = $31,000 + $12,280/ + $12,280/ 2 + $22,280/ 3= $655 IRR = 21% PBP = years AAR = $5280/{(31,000 + 24,000 + 17,000 + 10,000)/4} = % ? Should the firm invest in this project? Why or why not? Yes the NPV 0, and the IRR required return Fall 2021 COMM 203 11 Changes in Net Working Capital ? Ine statements don’t reflect ? sales on credit ? costs paid later ? Estimate changes in NWC Fall 2021 COMM 203 12 Example: Changes in Net Working Capital 0 1 C h a n g eA/ R $100 $200 100IN V 100 150 50 A/ P 100 50 5 0N W C $100 $300 C h g .N W C= $ 200Assumption: ? Fixed asset spending is zero. ? Change in working capital = $200: Fall 2021 COMM 203 13 Example: Changes in Net Working Capital (continued) Now, estimate operating and total cash flow: S a l e s $300C o s t s 200D e pr e c i a t i o n 0E BI T $100T a x 0Ne t I n c o m e $100OCF = EBIT + Dep. ? Taxes = $100 Total Cash flow = OCF? Change in NWC ? Capital Spending = $100 ? 200 ? 0 = ? $100 Fall 2021 COMM 203 14 Example: Changes in Net Working Capital (concluded) ? Where did the $100 in total cash flow e from? ? What really happened: Cash sales = $300 100 = $200 (collections) Cash costs = $200 + 50 + 50 = $300 (disbursements) Cash flow = $200 300= $100 (= cash in ? cash out) Fall 2021 COMM 203 15 CCA Property Classes (See Chapter 2) C l a s s R a t e E x a m pl e s8 20% F u r n i t u r e , ph o t o c o pi e r s 10 30%Va n s , t r u c k s , t r a c t o r s a n dc o m pu t e r e qu i pm e n t13 S t a i gh t l i n e Le a s e h o l d i m pr o v e m e n t s 22 50% P o l l u t i o n c o n t r o l e qu i pm e n t Fall 2021 C