ACFM 203 incremental free cash flows

what are the 3 cash flows in a typical porject

1. initial outlay

2. ongoing cash flow

3. terminal cash flow

initial outlay examples

purchase of inventory/equipment, initial development cost (increase in net working capital)

ongoing cash flows examples

incremental revenue/cost, taxes, (change in net working capital)

what are incremental cash flows

cash that flows from one project that adds to company’s overall cash flow

what does a financial manager do (2 key roles)

1. decide if we are going to invest in new equipment/project (using ROA)

2. how are we going to pay for new equipment/project

terminal cash flow example

sale of equipment, shut down cost, (decrease in net working capital)

how to determine incremental earnings (4 steps)

1. determine incremental revenue

2. determine incremental cost

3. determine SGA and expense

4. determine depreciation expense for the year

incremental revenue =

additional unit sold * price

incremental cost =

additional unit sold * price

depreciation expense per yr =

revenue - COGS = GP - SGA - Depr. = EBIT - income tax

why do we add back depr. for incremental free cash flow

because depr. is not a real cash flow

incremental free cash flow =

incremental earnings + depr

what is incremental free cash flow

how much cash we actually have in the bank

why is marketing an item not included in the incremental free cash flow

because it is considered a sunk cost

what is sunk cost

the cost of doing business

what is maturity matching

when debtor loan out money during the period in which there is cash flow

what is cannibalization

when the sale is taken away from one product line and is drawn to another product line within the same company

how does complementary increase incremental cash flow

consumer is going to buy the commentary product too