FINA 2201 Chapter Notes - Chapter 12: Cash Flow, Sunk Costs, Fixed Asset

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periwinkledinosaur391

31 Mar 2016

School

Northeastern University

Department

Finance & Insurance

Course

FINA 2201

Professor

Mazur Jack

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Document Summary

A typical project will require the firm to spend money upfront at t=0 to make the necessary investments in fixed assets and net operating working capital. The first bracketed term in the free cash flow equation [ebit(1 t) + depreciation and amortization] represents the project"s operating cash flows the company sells the project"s fixed assets and inventory and receives cash. The price that the company receives for a fixed asset at the end of the project is often referred to as its salvage value. Taxes paid on salvaged assets=tax rate*(salvage value-book value) book value equals the initial price for the asset minus the asset"s total accumulated depreciation. Timing of cash flows generally assume that all cash flows occur at the end of the year. Incremental cash flows are flows that will occur if and only if some specific event occurs.

Related Questions

Calculate and discuss the importance of the following ratios:

Liquidity Ratiosâworking capital, current ratio, quick/acid-test ratio, receivable turnover, average day's sales uncollected, inventory turnover, average day's inventory on hand, operating cycle

Profitability Ratiosâprofit margin, asset turnover, return on assets, debt-to-equity ratio, return on equity

Long-term Solvency Ratiosâdebt-to-equity ratio, debt to total assets, times interest earned, cash debt coverage

Cash Flow Ratiosâcash flow yield, cash flows to sales, cash flows to assets, free cash flow

Market Strength RatiosâEarnings per share, price-earnings per share, payout ratio, book value per share

lilacmink742

Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs (other than depreciation) of $70,000. Kurt’s pay $5,000 a year as interest on its debt. The project has a 4-year life. The company uses straight-line depreciation to a zero salvage value over the life of the project. The tax rate is 35%. What is the annual (Year 1) operating cash flow for this project?

DDK Industries is considering a new capital budgeting project that will last for three years. The initial investment outlay for project equipment is expected to be $110,000. The equipment will be straight-line depreciated down to zero book value over the three year period. The expected market value of the project assets is forecasted to be $50,000 when the project is liquidated at the end of the third year. Project will require $7,000 Net Working Capital investments in years 1 and 2. The project does not require any investment in fixed assets during years 1 and 3, but a $10,000 investment is projected in year 2. DDKâs cost of capital is 12% and the project does not have a distinct risk profile. DDKâs tax rate is 35%. Based on extensive research, analysts have prepared the following incremental revenues and before tax costs:

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
Depreciation		36,667	36.667	36,667
EBIT		13,333	13,333	13,333
Capital Expenditures	-110,000	0	-10,000	0

Note: Additional fixed capital investments are depreciated straight line over a three-year period; the first depreciation expense is deducted at the end of the year following the investment. The 50,000 liquidation value reflects enhancements realized through capital investments in fixed assets.

The after tax project cash flow including the terminal cash flow for the project in year 3 is closest to ___________?

goldfrog557

FINA 2201 Chapter Notes - Chapter 12: Cash Flow, Sunk Costs, Fixed Asset

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