上海财经大学杨葵Corporation Finance-Less06-1

Learning Objectives LESSON SIX Capital Budgeting: Cash flow estimation 1. 2. 3. 4. 5.

Describe the capital budgeting decision process Define the relevant cash flows to evaluate in capital budgeting p g g Calculate the present value of tax shields arising from CCA Perform the additional analysis necessary when cash flows are uncertain Identify the additional complications introduced by cash flows involving international operations

Introduction There are a number of institutional and conceptual complexities that need to be understood when examining a firm’s capital expenditure decisions such as: dit d i i h Generating project ideas Estimating cash flows Evaluating and selecting projects Implementing and abandoning projects

Generating Project Ideas Generating good project ideas is critical for capital budgeting success A firm should pursue only projects in which it can create sustainable advantages Two ways a company can build competitive advantage are: 1. Differentiation 2. Operating more efficiently (low cost producer)

Estimating Cash Flows Estimating cash flows is the most critical prerequisite for successful capital budgeting Variable forecasts must be made several years into the future for new products or services such as:

Estimating Cash Flows General issues that arise in deriving cash flows include: Relevance of marginal or incremental cash flow Time horizon Intangibles External effects Effects of price-level changes priceFinancial charges and taxes Assumptions

- Facility expenditures - Sales quantities and product prices - Possible effects of the new product on the sales of existing lines - Operating expenditures - Additional investments required in working capital