chapters 3 12 financial statements cash flow estimation (1)
TRANSCRIPT
![Page 1: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/1.jpg)
1
Chapter 3•Financial Statements
Balance SheetIncome StatementStatement of Cash Flows
• Accounting income v.s Cash flow•MVA and EVA
Cal State East Bay
![Page 2: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/2.jpg)
2
Topics in Chapter
• Income statement• Balance sheet• Statement of cash flows• Accounting income versus cash flow• MVA and EVA
Cal State East Bay
![Page 3: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/3.jpg)
3
Income Statement2006 2007
Net Sales 2,850 3,000 Operating costs 2,497 2,616.2 Deprec. 90 100 EBIT 263 283.8 Int. expense 60 88 EBT 203 195.8Taxes (40%) 81.2 78.3Preferred dividends 4 4Net income 117.8 113.5Common dividends 53 57.5Retained earnings 64.8 56
Cal State East Bay
![Page 4: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/4.jpg)
4
What happened to sales and net income?
• Sales increased.• Costs increased as expected with sales.• Interest expense increased.
Cal State East Bay
![Page 5: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/5.jpg)
5
Balance Sheet: Assets2006 2007
Cash 15 10 Short term investments
65 0
Accounts receivable 315 375Inventories 415 615 Total CA 810 1,000 Net FA 870 1,000 Total assets 1,680 2,000
Cal State East Bay
![Page 6: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/6.jpg)
6
Effect of Expansion on Assets• Net fixed assets increased.• AR and inventory increased.• Cash and short-term investments fell.
Cal State East Bay
![Page 7: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/7.jpg)
7
Statement of Retained Earnings, 2007
Balance of ret. earnings, 12/31/2006 710
Add: Net income, 2007 113.5
Less: Dividends paid, 2007 (57.5)Balance of ret. earnings, 12/31/2007 766
Cal State East Bay
![Page 8: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/8.jpg)
8
Balance Sheet: Liabilities & Equity
2006 2007Accts. payable 30 60Notes payable 60 110 Accruals 130 140 Total CL 220 310 Long-term debt 580 754 Common stock 130 130Ret. earnings 710 766 Total equity 840 896 Total L&E 1,680 2,000
Cal State East Bay
![Page 9: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/9.jpg)
9
What effect did the expansion have on liabilities & equity?
• CL increased as creditors and suppliers “financed” part of the expansion.
• Long-term debt increased to help finance the expansion.
• The company didn’t issue any stock.
Cal State East Bay
![Page 10: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/10.jpg)
10
Statement of Cash Flows: 2007
Operating ActivitiesNet Income (before preferred div.) 117.
5Adjustments: Depreciation 100 Change in AR (60) Change in inventories (200) Change in AP 30 Change in accruals 10 Net cash provided by ops. (2.5)Cal State East Bay
![Page 11: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/11.jpg)
11
Investing Activities Cash used to acquire FA (230) Sale of Short term investments
65
Net cash provided by inv. act. (165)
Cal State East Bay
![Page 12: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/12.jpg)
12
Financing Activities Change in notes payable 50 Change in long-term debt 174 Payment of cash dividends (61.5)Net cash provided by fin. act. 162.5
Cal State East Bay
![Page 13: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/13.jpg)
13
Summary of Statement of CF
Net cash provided by ops. (2.5)Net cash to acquire FA (165)Net cash provided by fin. act. 162.5Net change in cash (5)Cash at beginning of year 15Cash at end of year 10Cal State East Bay
![Page 14: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/14.jpg)
14
What can you conclude from the statement of cash flows?
• Net CF from operations = -$2.5, because of increases in working capital.
• The firm spent $165 on FA. • The firm borrowed and sold some short-term
investments to meet its cash requirements.• Even after borrowing, the cash account fell by
$5.
Cal State East Bay
![Page 15: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/15.jpg)
15
What is free cash flow (FCF)? Why is it important?
• FCF is the amount of cash available from operations for distribution to all investors (including stockholders and debtholders) after making the necessary investments to support operations.
• A company’s value depends upon the amount of FCF it can generate.
Cal State East Bay
![Page 16: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/16.jpg)
Cal State East Bay 3 - 16
•Sales Revenues
•Operating Costs and
Taxes
•Required Investments
in Ops.
•Financing Decisions
•Interest Rates
•Firm Risk •Market Risk
•Free Cash Flows (FCF)
•Weighted Average Cost
of Capital (WACC)
)1()1()1()1( 33
22
11
WACCFCF
WACCFCF
WACCFCF
WACCFCFValue
•Value of the Firm
•Basic Corporate Valuation Model
![Page 17: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/17.jpg)
17
What are the five uses of FCF?
1. Pay interest on debt.2. Pay back principal on debt.3. Pay dividends.4. Buy back stock.5. Buy nonoperating assets (e.g.,
marketable securities, investments in other companies, etc.)
Cal State East Bay
![Page 18: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/18.jpg)
18
What are operating current assets?
• Operating current assets are the CA needed to support operations.– Op CA include: cash, inventory, receivables.– Op CA exclude: short-term investments,
because these are not a part of operations.
Cal State East Bay
![Page 19: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/19.jpg)
19
What are operating current liabilities?
• Operating current liabilities are the CL resulting as a normal part of operations.– Op CL include: accounts payable and
accruals.– Op CL exclude: notes payable, because this
is a source of financing, not a part of operations.
Cal State East Bay
![Page 20: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/20.jpg)
20
What effect did the expansion have on net operating working capital (NOWC)?
NOWC07 = ($10 + $375 + $615)
- ($60 + $140)= $800.
NOWC06 = $585.
= -Operating CA
Operating CLNOWC
Cal State East Bay
![Page 21: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/21.jpg)
21
What effect did the expansion have on total net operating capital (also just
called operating capital)?• Operating Capital= NOWC + Net fixed
assets.• Operating Capital 2007 = $800 + $1,000 =
$1,800.• Operating Capital 2006 = 870 + 585=
$1,455.
Cal State East Bay
![Page 22: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/22.jpg)
22
Did the expansion create additional net operating profit
after taxes (NOPAT)? NOPAT = EBIT(1 - Tax rate)
NOPAT07 = $283.8(1 - 0.4)
= $170.3.
NOPAT06 = $157.8.
Cal State East Bay
![Page 23: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/23.jpg)
23
What was the free cash flow (FCF) for 2007?
FCF = NOPAT - Net investment in operating capital = $170.3 - ($1,800 - $1,455) = $170.3 - $345 = -$174.7.
Cal State East Bay
![Page 24: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/24.jpg)
24
Return on Invested Capital (ROIC)
ROIC = NOPAT / operating capital
ROIC07 = $170.3/ $1,800 = 9.46%.
Cal State East Bay
![Page 25: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/25.jpg)
25
The firm’s cost of capital is 10%. Did the growth add value?
• No. The ROIC of 9.46% is less than the WACC of 10%. Investors did not get the return they require.
• Note: High growth usually causes negative FCF (due to investment in capital), but that’s ok if ROIC > WACC. For example, Home Depot had high growth, negative FCF, but a high ROIC.
Cal State East Bay
![Page 26: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/26.jpg)
26
Economic Value Added (EVA)• WACC is weighted average cost of capital
• EVA = NOPAT- (WACC)(Capital)
Cal State East Bay
![Page 27: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/27.jpg)
27
Economic Value Added(WACC = 10% for both years)
EVA = NOPAT- (WACC)(Capital)EVA07 = $170.3- (0.10)($1,800)
= $170.3- $188= -$17.7.
EVA06 = $157.8 - (0.10)($1,455)
= $157.8 - $145.5= $12.3
Cal State East Bay
![Page 28: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/28.jpg)
28
Stock Price and Other Data
2006 2007
Stock price $26 $23
# of shares 50 50
Cal State East Bay
![Page 29: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/29.jpg)
29
Market Value Added (MVA)• MVA = Market Value of the Firm - Book
Value of the Firm• Market Value = (# shares of stock)(price
per share) + Value of debt• Book Value = Total common equity + Value
of debt
(More…)Cal State East Bay
![Page 30: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/30.jpg)
30
MVA (Continued)• If the market value of debt is close to the
book value of debt, then MVA is:
• MVA = Market value of equity – book value of equity
Cal State East Bay
![Page 31: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/31.jpg)
31
2007 MVA (Assume market value of debt = book value of debt.)
• Market Value of Equity 2007:– (50)($23.00) = $1,150.
• Book Value of Equity 2007:– $896.
• MVA07 = $1,150 - $896 = $254.
• MVA06 = $1,300 - $840 = $460.
Cal State East Bay
![Page 32: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/32.jpg)
32
CHAPTER 12
•Cash Flow Estimation and Risk Analysis
Cal State East Bay
![Page 33: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/33.jpg)
33
Free Cash Flow• FCF = NOPAT – Net investment in operating
capital• Gross investment in operating capital= Net
investment in operating capital + Depreciation• Operating cash flow = NOPAT + Depreciation• FCF= Operating cash flow – Gross investment in
operating capital
Cal State East Bay
![Page 34: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/34.jpg)
34
Free Cash Flow• FCF=operating cash flows – gross fixed
asset expenditures – (∆ operating current assets – ∆ operating current liabilities)
• FCF= investment outlay cash flow + operating cash flow + NOWC cash flow + salvage cash flow
Cal State East Bay
![Page 35: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/35.jpg)
35
Estimating cash flows:
– Relevant cash flows– Working capital treatment– Inflation
Cal State East Bay
![Page 36: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/36.jpg)
36
Proposed Project• $200,000 cost + $10,000 shipping +
$30,000 installation.• Economic life = 4 years.• Salvage value = $25,000.• MACRS 3-year class.
Cal State East Bay
![Page 37: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/37.jpg)
37
• Annual unit sales = 1,250.• Unit sales price = $200.• Unit costs = $100.• Net operating working capital (NOWC) =
12% of sales.• Tax rate = 40%.• Project cost of capital = 10%.
Cal State East Bay
![Page 38: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/38.jpg)
38
Incremental Cash Flow for a Project
• Project’s incremental cash flow is:
Corporate cash flow with the projectMinus
Corporate cash flow without the project.
Cal State East Bay
![Page 39: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/39.jpg)
39
Treatment of Financing Costs• Should you subtract interest expense or
dividends when calculating CF? • NO. We discount project cash flows with a cost
of capital that is the rate of return required by all investors (not just debtholders or stockholders), and so we should discount the total amount of cash flow available to all investors.
• They are part of the costs of capital. If we subtracted them from cash flows, we would be double counting capital costs.
Cal State East Bay
![Page 40: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/40.jpg)
40
Sunk Costs• Suppose $100,000 had been spent last year to
improve the production line site. Should this cost be included in the analysis?
• NO. This is a sunk cost. Focus on incremental investment and operating cash flows.
Cal State East Bay
![Page 41: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/41.jpg)
41
Incremental Costs• Suppose the plant space could be leased out for
$25,000 a year. Would this affect the analysis?• Yes. Accepting the project means we will not
receive the $25,000. This is an opportunity cost and it should be charged to the project.
• A.T. opportunity cost = $25,000 (1 - T) = $15,000 annual cost.
Cal State East Bay
![Page 42: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/42.jpg)
42
Externalities• If the new product line would decrease sales of
the firm’s other products by $50,000 per year, would this affect the analysis?
• Yes. The effects on the other projects’ CFs are “externalities”.
• Net CF loss per year on other lines would be a cost to this project.
• Externalities will be positive if new projects are complements to existing assets, negative if substitutes.
Cal State East Bay
![Page 43: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/43.jpg)
43
What is the depreciation basis?
Basis = Cost + Shipping + Installation $240,000
Cal State East Bay
![Page 44: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/44.jpg)
44
Annual Depreciation Expense (000s)
Year % X (Initial Basis) = Depr.
1 0.33 $240 $79.2
2 0.45 108.0
3 0.15 36.0
4 0.07 16.8
Cal State East Bay
![Page 45: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/45.jpg)
45
Annual Sales and Costs
Year 1 Year 2 Year 3 Year 4Units 1250 1250 1250 1250Unit Price
$200 $206 $212.18 $218.55
Unit Cost
$100 $103 $106.09 $109.27
Sales $250,000
$257,500
$265,225
$273,188
Costs $125,000
$128,750
$132,613
$136,588Cal State East Bay
![Page 46: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/46.jpg)
46
Why is it important to include inflation when estimating cash
flows?• Nominal r > real r. The cost of capital, r,
includes a premium for inflation.• Nominal CF > real CF. This is because
nominal cash flows incorporate inflation.• If you discount real CF with the higher
nominal r, then your NPV estimate is lower than what it should be.
• Use nominal cash flows and use nominal discount rate.
•Continued…Cal State East Bay
![Page 47: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/47.jpg)
47
Operating Cash Flows (Years 1 and 2)
Cal State East Bay
Year 1Year 2
Sales $250,000$257,500
Costs $125,000$128,750
Depr. $79,200$108,000
EBIT $45,800$20,750
Taxes (40%) $18,320$8,300
NOPAT $27,480$12,450
+ Depr. $79,200$108,000
Net Op. CF $106,680$120,450
![Page 48: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/48.jpg)
48
Operating Cash Flows (Years 3 and 4)
Cal State East Bay
Year 3Year 4
Sales $265,225$273,188
Costs $132,613$136,588
Depr. $36,000$16,800
EBIT $96,612$119,800
Taxes (40%) $38,645$47,920
NOPAT $57,967$71,880
+ Depr. $36,000$16,800
Net Op. CF $93,967$88,680
![Page 49: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/49.jpg)
49
Cash Flows due to Investments in Net Operating Working Capital (NOWC)
SalesNOWC
(% of sales)
CF Due toInvestmen
t in NOWC
Year 0 $30,000 -$30,000Year 1 $250,000 $30,900 -$900Year 2 $257,500 $31,827 -$927Year 3 $265,225 $32,783 -$956Year 4 $273,188 $0 $32,783
Cal State East Bay
![Page 50: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/50.jpg)
50
Salvage Cash Flow at t = 4 (000s)
Salvage Value $25Book Value 0Gain or loss $25Tax on salvage value
10
Net Terminal CF
$15
Cal State East Bay
![Page 51: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/51.jpg)
51
What if you terminate a project before the asset is fully
depreciated?• Basis = Original basis - Accum. deprec.• Taxes are based on difference between
sales price and tax basis.• Cash flow from sale = Sale proceeds-
taxes paid.
Cal State East Bay
![Page 52: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/52.jpg)
52
Example: If Sold After 3 Years for $25 ($ thousands)
• Original basis = $240.• After 3 years, basis = $16.8 remaining.• Sales price = $25.• Gain or loss = $25 - $16.8 = $8.2.• Tax on sale = 0.4($8.2) = $3.28.• Cash flow = $25 - $3.28 = $21.72.
Cal State East Bay
![Page 53: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/53.jpg)
53
Example: If Sold After 3 Years for $10 ($ thousands)
• Original basis = $240.• After 3 years, basis = $16.8 remaining.• Sales price = $10.• Gain or loss = $10 - $16.8 = -$6.8.• Tax on sale = 0.4(-$6.8) = -$2.72.• Cash flow = $10 – (-$2.72) = $12.72.• Sale at a loss provides tax credit, so cash flow is
larger than sales price!
Cal State East Bay
![Page 54: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/54.jpg)
54
Net Cash Flows for Years 1-3
0 1 2Init. Cost -
$240,0000 0
Op. CF 0 $106,680 $120,450NOWC CF -$30,000 -$900 -$927
Salvage CF
0 0 0
Net CF -$270,000
$105,780 $119,523Cal State East Bay
![Page 55: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/55.jpg)
55
Net Cash Flows for Years 4-53 4
Init. Cost 0 0Op. CF $93,967 $88,680NOWC CF -$956 $32,783Salvage CF 0 $15,000Net CF $93,011 $136,463
Cal State East Bay
![Page 56: Chapters 3 12 Financial Statements Cash Flow Estimation (1)](https://reader036.vdocuments.site/reader036/viewer/2022062317/577ccf211a28ab9e788ef379/html5/thumbnails/56.jpg)
56
•Enter CFs in CFLO register and I = 10.• NPV = $88,030.• IRR = 23.9%.
•0 •1 •2 •3 •4
•(270,000) •105,780 •119,523 •93,011 •136,463
Project Net CFs on a Time Line
Cal State East Bay