Corporate Finance Ch6

Rules about discounting

1. discount cash flows

2. discount incremental cash flows and ignore non incremental cash flows

3. treat inflation consistently

4. separate investments and financing decisions

5. forecast cash flows after taxes

How to go from accounting profit to cash flow

subtract capital expenditures and add back depreciation

Net Working Capital

NWC = Short term assets - short term liabilities

Incremental Cash flows

1. include effect on firm’s other businesses

2. recognize after-sales cash flows like service

3. salvage value

4. opportunity cost of pursuing project

   1. exclude overhead and sunk costs. would pay/paid anyway

How to treat inflation consistently

use nominal cash flows if discount rate is nominal

use real cash flows if  discount rate is real

3 components of project cash flows

total cash flow = cah flow from capital investment + operating cash flow + cash flow from investment in working capitalA

additional investment in working capital

= increase in inventory + increase in accounts receivable - increase in accounts payable