Capital Budgeting - Finance and Economics - Lecture Notes, Study notes of Finance

Download Capital Budgeting - Finance and Economics - Lecture Notes and more Study notes Finance in PDF only on Docsity! 1 Capital Budgeting Cash Flow Estimation - Incremental Operating Cash Flows = Cash Flows which result directly from the project Operating Cash Flows = Revenues - Operating Costs - Depreciation Operating Profits Before Taxes - Taxes NOPAT + Depreciation Operating Cash Flows INCREMENTAL OPERATING CASH FLOWS Sunk Costs - Not incremental Cash flow - Outlay that has already occurred or has been committed - Hire Market Research company to analyze new market for $100,000. Opportunity Costs - All relevant costs should be included in capital budgeting analysis. Effects on Other Projects Docsity.com 2 CHANGE IN NET OPERATINGWOKING CAPITAL Working Capital = Current Assets Net Operating Working Capital = Current Assets – Account Payable - Accruals DEPRECIATION - Straight Light - MACRS - Modified Cost Recovery System - Depreciable Basis - Purchase Price plus installation (modification) and shipping MACRS Recovery Allowances Ownership Year Class of Investment 3-Year 5-Year 7-Year 10-Year 1 2 3 4 5 6 7 8 9 10 11 33% 45 15 7 100% 20% 32 19 12 11 6 100% 14% 25 17 13 9 9 9 4 100% 10% 18 14 12 9 7 7 7 7 6 3 100% The formulas used to develop the table are prescribed by Congress and provided by the IRS Docsity.com