MGT 181 Chapter 10

what are relevant cash flows

The cash flows that should be included in a capital budgeting analysis are those that will only occur (or not occur) if the project is accepted

• incremental cash flows

Erosion or cannibalism

when the demand for one product eats into the demand for another project

Pro Forma

Financial statements projecting future years’ operations

cash flow from assets = OCF - net capital spending - changes in net working capital

Depreciation

a non-cash deductible and has cash flow consequences only because it influences the tax bill

• straight line depreciation: D = (initial cost - salvage) / number of years

• MACRS: multiply percentage given in table by the initial cost

book value

initial cost - accumulated depreciation

After tax salvage is where

last year of Net capital spending

initial cost are where

year zero of net capital spending