cash flow vs. accounting income
DESCRIPTION
Cash Flow vs. Accounting Income. Project Income Statement Revenues -Depreciation (D) - All other costs EBT -Taxes Project NI (PNI) Cash flow = PNI + Noncash expenses = PNI + Depreciation. Cash Flow Time Line. - PowerPoint PPT PresentationTRANSCRIPT
1 Cash Flow vs. Accounting Income
Project Income Statement
Revenues
- Depreciation (D)
- All other costs
EBT
- Taxes
Project NI (PNI)
Cash flow = PNI + Noncash expenses
= PNI + Depreciation
2 Cash Flow Time Line
0 1 2 3 4
CF0 OCF1 OCF2 OCF3 OCF4
Initial +
Cash Outlay Terminal
Cash Flow
NCF0 NCF1 NCF2 NCF3 NCF4
Distinguish among:
1. Initial cash outlay.
2. Operating cash flows.
3. Terminal cash flow.
3Data on 4 Period Expansion Project
n: 4 YearsSales Revenues: $60,000,000 per year starting 2007Variable Costs: 70% of sales per yearFixed Costs: $8,000,000 per yearBuilding: $12,000,000 in 2006Depreciation: MACRS - 392010 Mrkt Value: $7,500,000Equipment: $8,000,000 in 2006Depreciation: MACRS - 52010 Mrkt Value: $2,000,000Net Working
Capital (NWC): $6,000,000Tax: 40%Cost of Capital
(WACC): 12%
4BQC Expansion Project ($000s)
Building ($12,000)
Equipment (8,000)
Increase in NWC (6,000)
Total Investment ($26,000)
5BQC Expansion Project ($000s) 2006 2007 2008 2009 2010
Sales Revenues $60,000 $60,000 $60,000 $60,000
Variable costs (70% of sales) 42,000 42,000 42,000 42,000
Fixed costs 8,000 8,000 8,000 8,000
Depreciation (building) 156 312 312 312
Depreciation (equipment) 1,600 2,560 1,520 960
EBT $8,244 $7,128 $8,168 $8,728
Taxes (40%) 3,298 2851 3,267 3,491
Net Income $4,946 $4,277 $4,901 $5,237
Add back depreciation 1756 2872 1832 1272
Cash flow from operations 6,702 7,149 6,733 6,509
Return of NWC 6000
Net Salvage value 10,607
Net cash flow (26,000) 6,702 7,149 6,733 23,116
NPV (12%) 5,166 IRR=19
6Calculating Net Salvage After Tax
1) Book Value = original value - accumulated depreciation
2) Capital Gain or (Loss) = selling price - book value
3) Net Salvage Value After Tax
= selling price - capital gain tax
OR
= selling price + tax savings from book loss
Accumulated depreciation for Building = $1,092,000
Accumulated depreciation for Equipment = $6,640,000
7
1. Buy building : cash flow = ( 12,000 )
2. Buy machine : cash flow = ( 8,000 )
3. Annual tax saving from building depreciation
4. Annual tax saving from machine
5. Annual income after tax
6. NWC
7. Salvage in year 2010
8
Accounting Depreciation( Building ) = 1,092
Accounting Depreciation( Equipment ) = 6,640
Book value(Building) = 12,000 - 1,092 = 10,908
Book value (Eqipment)=8,000 - 6,640 = 1,360
9BQC Expansion Project
Year 1 2 3 4
Depreciation
(Building) 1.3% 2.6% 2.6% 2.6%
Depreciation
(Equipment) 20.0% 32.0% 19.0% 12.0%
10Time line of consolidated cash flows
(000’s)
2006 2007 2008 2009 2010
-26,000 6,702 7,149 6,733 23,116
Payback period: 3.23 Years
IRR: 19.3% versus a 12% cost of capital
MIRR: 17.2% versus a 12% cost of capital
NPV: $5,166
11Net Salvage Values
Total cash flow from salvage value = $8,863,200 + $1,744,000 =$10,607,200
Building Equipment Initial Cost $12,000,000 $8,000,000 2010 salvage (market)
value 7,500,000 2,000,000
2010 book value 10,908,000 1,360,000 Gain (loss) on sale (3,408,000) 640,000 Taxes (40%) (1,363,200) 256,000 Net Salvage value $8,863,200 $1,744,000
+ -
12Data on Replacement AnalysisCost of M1 (10 years ago): $7,500Expected Life: 15 yearsSalvage: 0Depreciation Method: Straight lineMarket value (today): $1,000Cost of M2 (today): $12,000Depreciation Method: MACRS- 3 yearsSalvage (at year 5): $2,000Increase in Net Working Capital:$1,000Increase in Earnings (before tax): $3,000 per
(or decrease in costs) yearTax 40%WACC 11.5%
13Replacement Analysis Worksheet
1) Investment Outlay
Cost of new equipment ($12,000)
Net Salvage of old equipment 1,600(Market value of old equipment 1,000
+Tax savings on sale of old equipment 600)
Increase in net working capital (1,000)
Total net investment ($11,400)
14Replacement AnalysisDepreciation Machine #1: 7500 / 15 = 500/year
Machine #1 Accumulated Depreciation =
10 years x 500 = 5000
1) Book Value = original value - accumulated depreciation
2500 = 7500 - 5000
2) Capital (Loss) = selling price - book value
(1500) = 1000 - 2500
3) Net Salvage Value After Tax
= selling price + tax savings from book loss
1600 = 1000 + [ 40%(1500)]
15Buy Machine #2
Before Taxes After Taxes
1) Earnings 3000 18002) Tax savings
from depreciationMACRS - 3 on 12,000 (new machine)Year % $
1 33 39602 45 54003 15 18004 7 8405 0 0
Accum depreciation = 12,000
16Replacement Analysis Worksheet2) Operating inflows over theproject’s life 0 1 2 3 4 5After-tax decrease in costs $1,800 $1,800 $1,800 $1,800 $1,800
Depreciation on new machine 3960 5400 1800 840 0
Depreciation on old machine -500 -500 -500 -500 -500
Change in depreciation 3460 4900 1300 340 (500)
Tax savings fromdepreciation (0.4 x 9)
1384 1960 520 136 (200)
Net operating cash flows 3184 3760 2320 1936 1600
3) Terminal year cash flows
Estimated salvage value ofnew machine
2000
Tax on salvage value (800)
Return of net working capital 1000
Total termination cash flows $2,200
4) Net cash flows
Total net cash flows ($11,400) $3,184 $3,760 $2,320 $1,936 $3,800
+
17Replacement Analysis
5) ResultsPayback period: 4.1 years
IRR: 10.1% versus an 11.5% cost of capital
MIRR: 10.7% versus an 11.5% cost of capital
NPV: -$388.77
18 Capital Budgeting Illustration
I. Data on Proposed New Asset
MACRS class: 3-year
Economic life: 4 years
Price: $200,000
Freight & installation: $40,000
Salvage value: $25,000
Effect on NWC: Increase inventories by $25,000 &
increase A/P by $5,000
Revenues: $200,000/year (100,000 units at $2/unit)
Costs (excluding depreciation): 60% of sales
Tax rate: 40%
Cost of capital: 10%
19 Capital Budgeting Illustration
II. Net Investment Outlay (t=0)
Price ($200,000)
Freight & Installation (40,000)
Increase in NWC (20,000) (25,000 - 5,000)
Net outlay ($260,000)
20
Annual Cash Flows (in ‘000)Year 0 1 2 3 4
Total revenues $200.0 $200.0 $200.0 $200.0
Operating costs
exclude depreciation (60%) 120.0 120.0 120.0 120.0
Depreciation (next slide) 79.2 108.0 36.0 16.8
Total costs $199.2 $228.0 $156.0 $136.8
EBT $ 0.8 ($ 28.0) $ 44.0 $ 63.2
Taxes (40%) 0.3 (11.2) 17.6 25.3
Net income $ 0.5 ($ 16.8) $ 26.4 $ 37.9
Depreciation 79.2 108.0 36.0 16.8
Net operating cash flows $ 79.7 $ 91.2 $ 62.4 $ 54.7
Equipment cost ($200)
Installation (40)
Increase in NWC (20)
Salvage value 25
Tax on salvage value (10)
Return of NWC 20
Net cash flows ($260.0) $ 79.7 $ 91.2 $ 62.4 $ 89.7
NPV = -$4.0 < $0 Discuss effects of:
IRR = 9.3% < k Do not accept project. 1. Sunk costs
MIRR = 9.6% < k 2. Opportunity costs
Payback= 3.3 years 3. Externalities