Common Types of Cash Flows Sunk costs costs that have accrued in the past Opportunity costs-costs of lost options Side effects Positive side effects -benefits to other projects Negative side effects costs to other projects ■( Changes in net working capital Financing costs Taxes 5
5 Common Types of Cash Flows n Sunk costs – costs that have accrued in the past n Opportunity costs – costs of lost options n Side effects q Positive side effects – benefits to other projects q Negative side effects – costs to other projects n Changes in net working capital n Financing costs n Taxes
Pro Forma Statements and Cash Flow ■ Capital budgeting relies heavily on pro forma accounting statements,particularly income statements a Computing cash flows-refresher Operating Cash Flow (OCF)=EBIT depreciation -taxes OCF Net income depreciation when there is no interest expense Cash Flow From Assets(CFFA)=OCF-net capital spending (NCS)-changes in NWC 6
6 Pro Forma Statements and Cash Flow n Capital budgeting relies heavily on pro forma accounting statements, particularly income statements n Computing cash flows – refresher q Operating Cash Flow (OCF) = EBIT + depreciation – taxes q OCF = Net income + depreciation when there is no interest expense q Cash Flow From Assets (CFFA) = OCF – net capital spending (NCS) – changes in NWC
Table 10.1 Pro Forma Income Statement Sales (50,000 units at $4.00/unit) $200,000 Variable Costs($2.50/unit) 125,000 Gross profit $75,000 Fixed costs 12,000 Depreciation($90,000 3) 30,000 EBIT $33,000 Taxes (34%) 11,220 Net Income $21,780 7
7 Table 10.1 Pro Forma Income Statement Sales (50,000 units at $4.00/unit) $200,000 Variable Costs ($2.50/unit) 125,000 Gross profit $ 75,000 Fixed costs 12,000 Depreciation ($90,000 / 3) 30,000 EBIT $ 33,000 Taxes (34%) 11,220 Net Income $ 21,780
Table 10.2 Projected Capital Requirements Year 0 1 2 3 NWC $20,000 $20,000 $20,000 $20,000 NFA 90,000 60,000 30,000 0 Total $110,000 $80,000 $50,000 $20,000 8
8 Table 10.2 Projected Capital Requirements Year 0 1 2 3 NWC $20,000 $20,000 $20,000 $20,000 NFA 90,000 60,000 30,000 0 Total $110,000 $80,000 $50,000 $20,000
Table 10.5 Projected Total Cash Flows Year 0 1 2 3 OCF $51,780 $51,780 $51,780 Change -$20,000 20,000 in NWC NCS -$90,000 CFFA -$110,00 $51,780 $51,780 $71,780 9
9 Table 10.5 Projected Total Cash Flows Year 0 1 2 3 OCF $51,780 $51,780 $51,780 Change in NWC -$20,000 20,000 NCS -$90,000 CFFA -$110,00 $51,780 $51,780 $71,780