| A | B |
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| What are 3 basic differences between accounting income and cash flow | 1) accountants recognize revenues/expenses as they occur. Finance focuses on when cash is recieved. 2) finance will look at oppurtunity cost before investing. 3) finance considers the impact of the project on the rest of the firm. |
| Free Cash Flow (FCF) | the cash flow available for distribution to all investors after the company has made all the investments in fixed assests, new products, and working capital neccessary to sustain ongoing operations. = Cash recieved by the firm before any investors are paid. |
| FCF | cashflows from operations - investments ppe - investments in working capital |
| cashflow from operations (FCF) | EBIT x (1-T) |
| investments (P.P.E.) | change in net PPE |
| Investments in working capital | change in NWC (current assests-current liabilities; accruals & acct. paya) |
| FCF | EBIT x (1-T) - change in net PPE - change in NWC or EBIT x (1-T) + D - Change in gross PPE - change in NWX (both get same value) |
| why don't include money spent on planning before a project | because it's a sunk cost. Need to focus on what changes from my decision |
| taxes to the ICO | 1) is it an assest expense? PPE? if so, we get no tax benefits today. Instead, we expense the item through depreciation as we use it. 2) is it an non-assest expense such as training, advertising, etc? if so, we can write-off this expense on the current year (yr. 0) income statement. |
| depreciable basis | equipment cost + any expense required to get equipment operational ( installation and delivery) |
| net salvage value | an assest's market value when salvaged plus any tax impact that may occur at any time. |
| market value | what you can sell the assest for |
| book value | balance sheet value of assest. |
| taxes | paid on the sale of an assest based on the difference between MV & BV |
| If a firm expects MV<BV | then it expects to have claimed too little in depreciation expenses by the end of the project and it expects to recieve a tax credit from the gov't at project termination. Assest sold at a loss |
| If a firm expects MV>BV | then it expects to have claimed too much in depreciation expenses by the end of the project. The firm will pay taxes on the gain. |
| products of a firm's working capital (NWC) | accounts recievable, accounts payable, and product inventory |
| the need for inventory | reduces a projects NPV |
| acct recievable | detract from the firm's cash position |
| acct. payable | positive to the firm's current cash position |
| current assest up | cashflow down |
| current liabilities up | cashflow up |
| incremental cash flow | the net change in a firm's overall cash flow that occurs when we accept a project. |
| oppurtunity cost | the cash I'm giving up today to pursue the project. Add to ICO |
| side effects | if the sale of an existing product is increased or decreased. |
| complement | if accepting the new project increases sales for the existing project. creates project synergy. |
| substitute | if accepting the new project decreases sake for the exisiting project |
| uncertainty | all estimates/forecasts for a project are wrong for ICO, OCF, TCF |
| project risk | the chance that our cashflow estimates differ from what we expect. bigger deviation(ranges in NPV), the greater the risk |
| sensitivity analysis (project risk analysis) | change one value at a time. (ex. value could be year one sale or expenses or NWC) and examine the effect on NPV. It show us where we need to be confident in our estimates |
| Scenerio analysis (project risk analysis) | look at possible outcomes for project. Usually, we have 3 cases: Bad, average, and good. Show us the range of possible NPV's. . risk..... |
| monte carlo simulation | computer simulation. gives all other cash flows a range of value. computer runs a trial where values are randomly selected, and then calculates NPV. 1000 trials are ran and then they find the average NPV and standard deviation of NPV |
| ICO | all initial expenses - tax saving + additional NWC + Oppurtunity Costs |
| OCF | (S-E-D) x (1-T) + D - Change in NWC + or - SE |
| TCF | MV - T(MV - BV) |
