1. Chapter 7 Capital Investments and Cash Flows

2. 2 Capital Budgeting Generating Ideas Estimate the Cash Outflows and Inflows Evaluate the Risks Select Projects Monitor the Accepted Projects

3. 3 Sources of Ideas Committees R&D Employees Vendors Competition

4. 4 Sources of Cash Flows Direct Cash Flows Indirect Cash Flows Incremental Cash Flows Sunk Costs

5. 5 Measuring Cash Flows As with Most Investment: Cash Flows Upfront Cash Flows Along the Way Cash Flows at End of Project

6. 6 NICO – Net Investment Cash Outflow (Upfront Cash Flow) Asset Acquisition - Investment in Depreciable Assets Asset Disposition - Tax Effect on Disposition Changes in Net Working Capital

7. 7 Tax Effects on Asset Disposition Dispose of Asset for More than Book Value: Disposition price – Tax on Gain Dispose of Asset for Less than Book Value: Disposition price + Tax Savings on Loss

8. 8 Annual Cash Flow Changes (Along the Way) ΔOCF = ΔEAT + ΔDEP ΔOCF = (ΔREV - ΔOP EXP - ΔDEP)(1 - T) + ΔDep Depreciation MACRS Class Life

9. 9 MACRS Tables

10. 10 Disposal/Terminal Cash Flows Asset Disposition - Tax Effect on Disposition Recovery of Net Working Capital