Download Estimating cash flow capital budgeting and more Exams Financial Management in PDF only on Docsity! Lecture: Estimating Cashflows Syed Karim Bux Shah (PhD) Assistant Professor IBA, University of Sindh, Jamshoro. Financial Management DR. KB SYED, IBAJ Outline • Introduction • Some key considerations • Taxes and depreciation • Expansion and Replacement Cases – Cashflow estimates in expansion case – Cashflow estimates in replacement case
Checklist
BASIC CHARACTERISTICS OF RELEVANT PROJECT FLOWS
Y Cash (not accounting income) flows
YI Operating (not financing) flows
YI After-tax flows
YJ Incremental flows
BASIC PRINCIPLES THAT MUST BE ADHERED TO
IN ESTIMATING “AFTER-TAX INCREMENTAL OPERATING CASH FLOWS”
Ignore sunk costs
Include opportunity costs
Include project-driven changes in working capital net of spontaneous changes in current
liabilities
Include effects of inflation
Ogee
As
DR. KB SYED, IBAJ Tax considerations • Method of Depreciation: Depreciation is the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both. • Depreciation lowers taxable income. – The greater the depreciation charges, the lower the taxes paid. • Although depreciation is a noncash expense, it does affect the firm’s cash flow by directly influencing the cash outflow of taxes paid. • Alternative procedures - straight-line and various accelerated depreciation methods. • Profitable firms prefer to use an accelerated depreciation method for tax purposes – one that allows for a more rapid write-off and, therefore, a lower tax bill. DR. KB SYED, IBAJ Revisiting MACRS • Modified Accelerated Cost Recovery System (MACRS) • The half-year convention must generally be applied to all machinery and equipment. • There is a half-year of depreciation in the year an asset is acquired and in the final year that depreciation is taken on the asset. DR. KB SYED, IBAJ Interim Incremental Net Cash Flows. • These are cash inflows generated by the project. DR. KB SYED, IBAJ Terminal Cash flows • Cash flow for the last year of the project when the project terminates. DR. KB SYED, IBAJ Example Data • Cost of equipment = $90, 000 • Useful life = 4 years • MACRS = 3-years • Shipping and installing = $10, 000 • Salvage Value = $16, 500 • Revenue estimate
