Chapter 12 Analyzing Project Cash Flows 12-1. Captain’s Cereal’s new Crunch Stuff n’ Stars is expected to generate $25M in sales. However‚ 20% of that will be cannibalized from the original cereal‚ Crunch Stuff. Thus‚ the sales amount that should be allocated to the new Stars version is only (100% − 20%) of the $25M‚ or $20M. This is an example of finding an “incremental” cash flow. As shown in equation 12-1‚ we only want to consider what is different if we go ahead with the project: incremental
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CMA DEFINITIONS-PART2: Why to look at financial statements? • It helps to analyze trends in data and operating results. • Trends are important because they may point to basic changes in the nature of the business. • With the use of ratios they help to evaluate a company’s past performance and are useful in projecting its financial future and also reflects a company’s performance compared to industry averages. Why ratios advantageous? • Measurement of economic events and transactions and
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decide if this would be a feasible move for the company they need to perform a net present value analysis. To do this they will only need to look at the incremental cash flows‚ which are as follows: 1. Initial investment of $10 million that will be the cost to build the new factory. 2. Sales of $3 million a year that will result in an increase of $150‚000 in gross margin giving the company a 5% gross margin. 3. Value of salvage at the end of the life of the project of $14 million. NPV Computation
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purchase of new equipments and machinery‚ new products‚ and new business premises or factory buildings‚ as well as those required for R&D plans. The different techniques used for capital budgeting include: Profitability index Net present value Modified Internal Rate of Return Internal Rate of Return Besides these methods‚ other methods that are used include Return on Investment (ROI)‚ Accounting Rate of Return (ARR)‚ Discounted Payback Period and Payback Period. The different
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Chapter No. 11 – Capital Budgeting Contents ♦ Capital budgets as opposed to revenue budgets ♦ Different kinds of capital budgets – non-productive assets‚ improving operating efficiency and capital projects ♦ Choosing capital projects – Conventional and Discounted Cash Flow techniques ♦ Payback period‚ Discounted payback period‚ Net Present Value‚ Internal Rate of Return‚ Profitability Index methods ♦ Assumptions underlying different methods ♦ Introduction to IRR vs. NPV ♦ Incremental cash flow
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CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash
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need‚ the firm has a surplus of funds that it can use to reduce current liabilities‚ reduce long-term debt‚ buy back common stock‚ or increase dividends. If acceptable opportunities exist‚ the firm might also use the extra funds to purchase fixed assets thereby increasing its maximum capacity level‚ should that need be anticipated. 2. In the chapter‚ we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent‚ and the plowback ratio is about 67
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How to Calculate a Present Value Using Microsoft Excel I want to do this! What ’s This? Using Microsoft Excel to calculate the present value of a potential investment is a simple task once you learn the syntax of the required formula. Follow these easy steps and you can calculate present value using Microsoft Excel easily and quickly. Instructions 1. 1 Understand the concept of present value. Present value is one of the Time Value of Money calculations. Use it to answer questions
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increasing the hurdle rate 20% by 1% (for example‚ from 12% to 12.12%)‚ decreased the present value of 10% project inflows by 1%. Because costs remained roughly fixed‚ these changes 0% in the value of inflows translated into -10% changes in the net present value of projects. Figure A shows the substantial -20% 7% 8% 9% 10% 11% 12% impact of hurdle rates on the anticipated预期的 hurdle rate net present value of projects. If hurdle rates were to increase‚ Marriott’s growth would be reduced as once Figure
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MANAGING FINANCIAL RESOURCES AND DECISIONS CONTENT PAGE : Content page page 2 Introduction : page 3 Assignment task I. page 3 Identify the sources of finance available for business page
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