Cap Budgeting-Cash Flows
Cap Budgeting-Cash Flows
Flow
“Evaluating Proposed Capital Expenditure”
(CAPEX)
is called
“Capital Budgeting”
CAPEX NEWS– NLC
● NLC India invests big money into renewable energy (By
Debjoy Sengupta, ET Bureau|Updated: Jul 12, 2017, 01.15 AM IST)
Cash 2000000
What is Capital Expenditure
Cash 2000000
● Debiting an ASSET is CAPITAL Expenditure
Capital Expenditure (CAPEX) Planning
● Build a new plant Should We..?
● Independent Projects
● Mutually Exclusive Projects
● Project Sequencing/Contingent Project
● Capital Rationing
Cash Flows Versus Profit
● Cash flow is not the same thing
as profit, at least, for two
reasons.
– First, profit, as measured by an
accountant, is based on accrual concept.
16
Financial Appraisal Process
Initi Termina
al l
outla Cash
y0 1 2 3 4 5 6 . . flow
. n
0 1 2 3 4 5 6 ... n
Capital Budgeting Steps
Initi
al
outla
y0 1 2 3 4 5 6 ... n
Capital Budgeting Steps:
Initi Termina
al l
outla Cash
y0 1 2 3 4 5 6 . . flow
. n
Capital Budgeting Steps:
Initi Termina
al l
outla Cash
y0 1 2 3 4 5 6 . . flow
. n
Annual Cash
Flows
● a) Initial Outlay: What is the cash flow at “time
0?”
(127,000)
+ (shipping and installation costs)
(Depreciable Asset)
+ (Investment in working capital)
+ After-tax proceeds from sale of old asset
Net Initial Outlay
Evaluate Cash Flows
(127,000)
+ ( 20,000)
(Depreciable Asset)
+ (Investment in working capital)
+ After-tax proceeds from sale of old asset
Net Initial Outlay
Evaluate Cash Flows
(127,000)
+ ( 20,000)
(147,000)
+ (Investment in working capital)
+ After-tax proceeds from sale of old asset
Net Initial Outlay
Evaluate Cash Flows
● a) Initial Outlay: What is the cash flow at “time
0?”
(127,000)
+ ( 20,000)
(147,000)
+ ( 4,000)
+ After-tax proceeds from sale of old asset
Net Initial Outlay
Evaluate Cash Flows
(127,000)
+ ( 20,000)
(147,000)
+ ( 4,000)
+ 0
Net Initial Outlay
● a) Initial Outlay: What is the cash flow at
“time 0?”
(127,000)
+ ( 20,000)
(147,000)
+ ( 4,000)
+ 0
(151,000)
● b) Annual Cash Flows: What incremental
cash flows occur over the life of the project?
For Each Year, Calculate:
Incremental Revenue
- Incremental Costs
- Depreciation on project
Incremental Earnings before Taxes
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
Incremental Revenue
- Incremental Costs
- Depreciation on project
Incremental Earnings before Taxes
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
85,000
- Incremental Costs
- Depreciation on project
Incremental Earnings before Taxes
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5
85,000
(29,750)
- Depreciation on project
Incremental Earnings before Taxes
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5
85,000
(29,750)
(29,400)
Incremental Earnings before Taxes
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
85,000
(29,750)
(29,400)
25,850
- Tax on Incremental EBT
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
85,000
(29,750)
(29,400)
25,850
(8,789)
Incremental Earnings after Taxes
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
85,000
(29,750)
(29,400)
25,850
(8,789)
17,061
+ Depreciation Reversal
Annual Cash Flow
For Years 1 - 5:
85,000
(29,750)
(29,400)
25,850
(8,789)
17,061
29,400
Annual Cash Flow
For Years 1 - 5
85,000 Revenue
(29,750) Costs
(29,400) Depreciation
25,850 EBT
(8,789) Taxes
17,061 EAT
29,400 Depreciation reversal
46,461 = Annual Cash Flow
Evaluate Cash Flows
Salvage Value
+/- Tax effects of capital gain/loss
+ Recapture of Net Working Capital
Terminal Cash Flow
Evaluate Cash Flows
● CF(0) = -151,000
● CF(1 - 4) = 46,461
● CF(5) = 46,461 + 37,000 = 83,461
● Discount rate = 14%
● NPV = 27,721
● We would accept the project.
Calculation of Cash Flows