MAKING CAPITAL INVESTMENT DECISIONS
A. ... Net Working Capital
New projects often require incremental investments in cash, inventories, and ýreceivables that need
to be included in cash flows if they are not offset by changes in payables. Later, as ýprojects end, this investment is often recovered. ... ýFinancing costs represent part of the division of cash flows from a project to providers ýof capital and are reflected in the discount rate used to discount the project cash flows. ... Determine the sales projection, variable costs, fixed costs, ýand capital requirements. ... It is chiefly a reflection of ýhow we choose to finance a project, and, ignoring some of the finer points of capital ýstructure, it is usually not an important factor in determining the value of the project. ... In capital budgeting, we are trying to determine the value of the left-hand ýý(asset) side of the balance sheet. ... The impact of ýdebt is considered in deriving the required return (cost of capital). ... Project Cash Flows
From the pro forma statements, compute: Cash flow from assets = operating cash ýflow - capital spending +/- changes in net working capital Operating cash flow = + ýearnings before interest and taxes (EBIT) + depreciation - taxes. Capital spending at ýthe time of project inception (i. ... , the "initial outlay") includes the following
items:ý
ý+ purchase price of the new assetý
ý- selling price of the asset replaced (if applicable)ý
ý+ costs of site preparation, setup, and startup
ý+/- increase (decrease) in tax liability due to sale of old asset at other than book valueý
ý= net capital spendingý
C. ... Forecasting Risk
Forecasting risk-the danger of making a bad (value-destroying) decision because of ýerrors in projected cash flows. ... ý
ADDITIONAL CONSIDERATIONS IN CAPITAL BUDGETING
A. Managerial Options and Capital Budgeting
Managerial options-the opportunity to change ones plans dependent upon future ýevents. ... For further discussion, see "Waiting to ýInvest: Investment and Uncertainty" by Jonathan Ingersoll and Stephen Ross in the ýJanuary, 1992 issue of the Journal of Business, pp.
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