Textbook Notes (363,688)
Canada (158,529)
Finance (37)
MGFB10H3 (19)
Derek Chau (11)
Chapter 14

Chapter 14 Notes

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Derek Chau

Chapter 14 Cash Flow Estimation and Capital Budgeting Decisions Notes 14.1 General Guidelines for Capital Expenditure Analysis marginal or incremental cash flows additional cash flows that result from budgeting decisions, generated by new projects sunk costs costs that have already been incurred, cannot be recovered, and should not influence current decisions opportunity costs cash flows that must be forgone as a result of an investment decision externalities the consequences that result from an investment that may benefit or harm unrelated third parties 14.2 Estimating and Discounting Cash Flows The Initial After-Tax Cash Flow (CF ) 0 initial after-tax cash flow (0F ) the total cash outlay required to initiate an investment project, including the change in net working capital and associated opportunity costs, which may affect the firms cash flow, but cannot be expensed for tax purposes capital cost (0 ) all costs incurred to make an investment operational, such as machinery installation expenses, land-clearing costs, and so on; these can be depreciated for tax purposes; different from initial after-tax cash flow CF0 = C 0 NWC + OC0 Expected Annual After-Tax Cash Flows (CF) t expected annual after-tax cash flows (CFt the cash flows that are estimated to occur as a result of the investment decision, comprising the associated expected incremental increase in after-tax operating income and any incremental tax savings (or additional taxes paid) that result from the initial investment outlay Two Ways to Determine Cash Flows after Capital Cost Allowance Before-tax operating income (before depreciation) Before-tax operating income (before depreciation) CCA Taxes payable on operating income Taxable Income After-tax operating income Taxes payable + CCA tax savings After-tax income Net cash flow + CCA (non-cash expense) Net cash flow CF t CFBT (1t T) + CCA (T)t where CFBT =tcash flow before taxes (i.e., incremental pre-tax operating income), CCA = the CCA expense for yea
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