Topical review
- Identify and calculate relevant after-tax cash flows from a project
- Initial outlays
- Estimate of depreciation using MACRS (use tables on p. 469) - include shipping and installation
- Operating cash flows (NOPAT, depreciation) - work through mini-income statement
- Investment and changes in working capital
- Terminal cash flows (salvage) including release of WC - potential tax effects of selling fixed assets
- Other issues in estimating cash flow
- Incremental free cash flows
- Externalities, such as cannibalization/synergies
- Opportunity and sunk costs
- Ignore interest costs - already accounted for in WACC
- Discuss methods that are used to measure stand-alone risk of projects including advantages and disadvantages of the approaches
- Sensitivity analysis - what if one variable changes
- Scenario analysis - vary several inputs to determine best/worst outcomes
- Monte Carlo analysis - let computer generate scenarios
- Identify types of real options available in capital budgeting projects when managers can influence the cash flows of a project
- Components of after-tax cash flows: initial outlay, operating cash flows, terminal cash flows, salvage, depreciation, externalities, cannibalization, synergies, opportunity costs, sunk costs,
- Risk analysis: stand-alone risk, corporate risk, market risk, sensitivity analysis, scenario analysis, Monte Carlo analysis
- Real options: growth option, abandonment option, timing option, flexibility option
ST-1, #3, 6
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