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33:390:310 Lecture Notes - Lecture 10: Pro Forma, Capital Budgeting, Franchising

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rubysalmon273
14 Oct 2017
School
Rutgers University
Department
Finance
Course
33:390:310
Professor
Hoffman

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Document Summary

Page 321 about how people actually do irr, there is not actually one number. Sit in a room and talk about it. Relevant cash flows: the cash flows that should be included in a capital budgeting analysis are those that will only occur or not occur if the project is accepted. Common types of cash flows: sunk costs: costs that have accrued in the past no, opportunity costs: costs of lost options yes. Side effects yes: positive side effects: benefits to other projects, negative side effects: costs to other projects, changes in nwc yes, franchising costs no, taxes yes. Pro forma statements and cash flow: capital budgeting relies heavily on pro forma (going forward and making estimates) accounting statements, particularly income statements, ccf-refreshers, ocf = ebit + depr. Taxes: ocf = ni +depr, cffa = ocf ncs changes in nwc. Depreciation: depreciation expense used for capital budgeting should be the depr schedule required by the.

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Related Questions

Which of the following should be included in the capital budgeting decision
Select one:
A. Sunk costs
B. Opportunity costs
C. Relevant externalities
D. #2 and #3 should be included
E. All of the above should be included

Which of the following is NOT correct
Select one:
A. If an investment project would make use of land which the firm already owns, the opportunity cost of the land is a relevant cash flow and should be included with other project cash flows
B. Analysis of capital projects focuses on cash flows rather than accounting income
C. Changes in working capital do not need to be considered in capital project analysis
D. All of the above are correct

Stock dividends
Select one:
A. are similar to stock splits in that they do not change the fundamental position of current shareholders
B. must be accompanied by cash dividends
C. are viewed unfavorably by investors and thus should not be used
D. have the same effect on financial statements as cash dividends


A project has initial costs of $5,000 and subsequent cash inflows of $1800, 1275, 1875, and 1525. The company's cost of capital is 10%. Calculate the Payback Period for the project
Select one:
A. 2.83 years
B. 3.03 years
C. 3.33 years
D. 4.00 years

Capital budgeting criteria: ethical considerations A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $51 million, and the expected net cash inflows would be $17 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $18 million. The risk-adjusted WACC is 10%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. NPV $ million IRR % How should the environmental effects be dealt with when this project is evaluated? The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation" analysis from not doing the environmental mitigation. The environmental effects should be ignored since the mine is legal without mitigation. The environmental effects should be treated as a sunk cost and therefore ignored. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. Should this project be undertaken? If so, should the firm do the mitigation? Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected net cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk adjusted WACC is 10%.

a. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $____
IRR ___%

b. How should the environmental effects be dealt with when this project is evaluated?

The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated allcosts in the "no mitigation" analysis from not doing the environmental mitigation.

The environmental effects should be ignored since the mine is legal without mitigation.

The environmental effects should be treated as a sunk cost and therefore ignored.

The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

c. Should this project be undertaken?

If so, should the firm do the mitigation?

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis.

Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its IRR when mitigation costs are not included in the analysis.