FIN 475 Lecture 3: Capital Budgeting
Document Summary
Operating cash flow sales, cogs, fixed costs, depreciation, taxes, etc. Net present value: present value of all cash flows from project. Internal rate of return (irr): set npv to 0, rate at which project breaks even. Net working capital = current assets less current liabilities. Why find change in nwc instead of using nwc. When current assets increase, expenditures increase increase in nwc = cash outflow. When current liabilities decrease, expenditures decrease decrease in nwc = cash inflow. Sales less cogs less depreciation = earnings before interest and taxes (ebit) less interest expense = Earnings before taxes less taxes = net income. Add back depreciation (non-cash expense) and interest expense (financing cash flow) To calculate correct npv, use npv function on cash flows from year 1 then manually factor in initial investment.
