n) = F(2.30) F occurs at the same time as the last A Uniform Series of **Cash** **Flows** Discounted **Cash** **Flow** Formulas Principles of Engineering Economic **Analysis**, 5th edition Example 2. 17 Troy Long deposits a single sum of money in a savings account /),12) i eff = 6.364% Example 2.39 Principles of Engineering Economic **Analysis**, 5th edition When Compounding and **Cash** **Flow** Frequencies Differ When compounding frequency and **cash** **flow** frequency differ, the following approach is taken. Let r denote the nominal annual /

(P/E) Ratio Ratio **Analysis** P/E = $32.25/$2.90 = 11.1 Summarizing All Ratios IAS 7 **Cash** **Flows** Users of an entity’s financial statements are interested in how the entity generates and uses **cash** and **cash** equivalents Provide information about the historical changes in **cash** and **cash** equivalents of an entity by means of a statement of **cash** **flows** Classification of **cash** **flows** during the period as operating/

Financial analysts often compute a firm’s earnings before interest, taxes, depreciation, and amortization, or EBITDA. Because depreciation and amortization are not **cash** **flows**, this subtotal reflects the **cash** a firm has earned from operations. 46 2.5 Income Statement **Analysis** Leverage Ratios: Interest Coverage Ratio Also known as times interest earned (TIE). TIE = earnings divided by interest Can define earnings as operating income/

required rate of return of 12% because the net present value is positive. Illustration: Calculate the net present value. Discounted **Cash** **Flow** SO 10 Distinguish between the net present value and internal rate of return methods. Unequal Net Annual **Cash** **Flows** Illustration 26-27 **Analysis** of proposal using net present value method 26-60 26-61 IRR method finds the interest yield of the potential/

**Cash** **Flow** **Analysis** to Make Investment Decisions Project **Analysis** By : Else Fernanda, SE.Ak., M.Sc. ICFI Topics Covered Identifying **Cash** **Flows** – Discount **Cash** **Flows**, Not Profits – Discount Incremental **Cash** **Flows** – Discount Nominal **Cash** **Flows** by the Nominal Cost of Capital – Separate Investment & Financing Decisions Calculating **Cash** **Flows** ICFI Applying the Net Present Value Rule to Real World Situations Making Investment Decisions using NPV involves the following steps: 1.Forecast project **cash** **flows**/

Break-even Potential Reductions in EBITDA Probability of Default Loss on Debt 54 Short-term **Cash** **Flow** **Analysis** and Liquidity Seasonality versus trends in **cash** **flows** relative to current assets and current liabilities Fixed and Variable Costs: how changes in revenues impact profit **Cash** **Flows** and revolving credit facilities – Managing the working capital cycle Business cycles and businesses Stocking Selling Destocking Applying and evaluating the main ratios/

Process Bookkeeping Accounting Financial Statements The Balance Sheet The Income Statement The Accumulated Retained Earnings Statement Sources And Uses Of Funds (**Cash** **Flow**) Statement **Analysis** of Changes in Working Capital Financial **Analysis** Techniques Ratio **Analysis** Profit **Analysis** **Cash** **Flow** **Analysis** Breakeven **Analysis** Conclusion 4 FINANCIAL **ANALYSIS** FINANCIAL **ANALYSIS** refers to the systematic study of the current or potential performance of a business enterprise. It provides guidelines for all asset/

©2014 Pearson Education, Inc. All rights reserved.13-8 Tools for Analyzing the Risk of Project **Cash** **Flows** There are many possible **cash** **flow** outcomes for any risky project. The analyst uses tools such as Sensitivity **analysis**, Scenario **analysis**, and Simulation **analysis** to better understand the uncertainty of future **cash** **flows**. Copyright ©2014 Pearson Education, Inc. All rights reserved.13-9 Key Concepts - Expected Values and Value Drivers Expected/

financial information through financial statements is critical to investors Understand the function of the balance sheet Understand how the income statement is used Interpret a statement of **cash** **flows** Understand the management’s discussion and **analysis** and the statement of stockholders equity Analyze a firm through its financial statements, including using the DuPont Identity Understand the main purpose and aspects of the Sarbanes/

be analyzed by those both inside and outside the firm? Marketing – Understand the effects of your decisions on the financial statements, particularly the income statement and the statement of **cash** **flows** – How **analysis** of ratios, especially those involving sales figures will affect the firm’s decisions about levels of inventory, credit policies and pricing decisions. Dr Noryati Ahmad Why this topic matters to/

is always greater than ordinary annuity See examples on page 310 through 312 89 SU 10.2 – Discounted **Cash** **Flow** **Analysis** – Hurdle rate Goal is for companies discount rate to be as low as possible. WACC or Shareholder’s /Discounted **Cash** **Flow** **Analysis** **Cash** **flows** and discounting NPV = **Cash** **flow** 0 **Cash** **flow** 1 **Cash** **flow** 2 (1 + r) 0 (1 + r) 1 (1 + r) 2 Comparing **Cash** **Flow** Patterns – Page 315 ++ 93 SU 10.2 – Discounted **Cash** **Flow** **Analysis** NPV vs IRR comparison – Reinvestment rate NPV assumes the **cash** **flow** can/

statement reveals some important aspects of the firm’s investment, financing, and dividend policies; making it an important tool for financial planning and **analysis**. 19 Statement of **Cash** **Flows** The **cash** **flow** statement shows how the net increase or decrease in **cash** has been reflected in the changing composition of current assets and current liabilities. It highlights changes in short-term financial policies. It helps answer/

and installation ( 500) Increase in net working capital ( 4,000) Initial investment $(14,000) Expansion Project **Analysis** of the **Cash** **Flows** Expansion Project Net Salvage Value Expansion Project **Analysis** of the **Cash** **Flows** Expansion Project **Cash** **Flow** Time Line Replacement Project **Analysis** of the **Cash** **Flows** Replacement Project **Cash** **Flow** Time Line Incorporating Risk in Capital Budgeting **Analysis** Stand-Alone Risk: the risk an asset would have if it were a firm’s only/

selection of an alternative together with for e.g., life cycle assessment, audits, etc. Thus, CBA is used in financial **analysis** to estimate the profitability of a potential investment for a cleaner production option. Elements of CBA Next Slide Elements of CBA **Cash** **flow** Present value (PV) Measures of Profitability Payback Period Net Present Value (NPV) Internal Rate of Return (IRR) Profitability Index/

is to take an investment if its AAR exceeds a benchmark. Chapter 10 Making Capital Investment Decisions Chapter Organization Incremental **Cash** **Flows** Terminology **Cash** **Flows** vs. Accounting Income Pro Forma Financial Statements and Project **Cash** **Flows** More on Project **Cash** **Flows** Alternative Definitions of Operating **Cash** **Flow** Some Special Cases of Discounted **Cash** **Flow** **Analysis** Summary and Conclusions Fundamental Principles of Project Evaluation: Project evaluation - the application of one or more capital budgeting/

the net present value and internal rate of return methods. Net Present Value Method Example: Equal Annual **Cash** **Flows** - Continued **Analysis** of proposal using net present values NPV positive for both discount rates Accept proposed capital expenditure at /the net present value and internal rate of return methods. Net Present Value Method Example: Unequal Annual **Cash** **Flows** - Continued **Analysis** of proposal using net present values NPV positive for both discount rates Accept proposed capital expenditure at either/

-project basis. 21 - 38 Learning Objective 7 Identify relevant **cash** inflows and outflows for capital budgeting decisions. 21 - 39 Relevant **Cash** **Flows** Relevant **cash** **flows** are expected future **cash** **flows** that differ among the alternatives. 21 - 40 Relevant **Cash** **Flows** Net initial investment components – **cash** outflow to purchase investment – working-capital **cash** outflow – **cash** inflow from disposal of old asset 21 - 41 Relevant **Cash** **Flow** **Analysis** Example Old equipment: Current book value$50,000 Current/

funds to the firm b Suppliers of raw materials or merchandise inventories may require that the inventories serve as collateral for the delayed payment Credit Risk **Analysis** b Circumstances leading to need for the loan b **Cash** **Flows** b Collateral b Capacity for Debt b Contingencies b Character of Management b Conditions Circumstances leading to need for the loan b The reason that/

$577,548 Engle, UAPB **Cash** **Flow** **Analysis**: Sructure ItemJanuaryFebruary Beginning **cash**$578,834$596,150 Total **cash** outflow$14,940$50,848 **Cash** available$596,150$577,548 New borrowing00 Ending **cash** balance$596,150$577,548 Engle, UAPB **Cash** **Flow** **Analysis**: Total **Cash** Inflow ItemJanuaryFebruary Beginning **cash**$578,834$596,150 Receipts from catfish sold $32,256 Total **cash** inflow$611,090$628,406 Engle, UAPB **Cash** **Flow** **Analysis**: Operating **cash** expenses ItemJanuaryFebruary Feed$2,783/

worksheet function cannot be used to solve for ERR. When faced with multiple negative-valued **cash** **flows**, we construct a new CF profile that contains the negative-valued **cash** **flows**, zeroes, and the future worth of the positive-valued **cash** **flows**, with the FW based on the MARR. External Rate of Return **Analysis** Multiple Alternatives Example 8.11 Recall the 5 equal-lived, mutually exclusive investment alternatives/

markets 11-34 © 2011 Pearson Prentice Hall. All rights reserved. Option to Abandon It may be necessary to abandon the project before its estimated life due to inaccurate project **analysis** models or **cash** **flow** forecasts or due to changes in market conditions. When comparing two projects with similar NPVs, project that is easier to abandon may be more desirable (example, temporary versus permanent/

are $54,000. All other variables are unchanged. T11.6 Fairways Driving Range Sensitivity **Analysis** (concluded) Net Project Scenario Rentals Revenues income **cash** **flow** NPV Best case 25,000 $75,000 $19,975 $23,975 $60,364 Base/=(FC+D)/(P-v) Operating **Cash** **Flow**, Sales Volume and Break-Even Given our focus on **cash** **flow**, the next evolution in break-even **analysis** is to look at the relationship between operating **cash** **flow** and sales volume **Cash** break-even - the point where operating **cash** **flow** (OCF) is zero OCF = /

effect of operating leverage. A small change in sales yields a much bigger change in OCF. Chapter Outline Evaluating NPV Estimates “Scenario” and other “What-if” Analyses Break-Even **Analysis** Operating **Cash** **Flow**, Sales Volume, and Break-Even Operating Leverage Capital Rationing Capital Rationing Capital rationing occurs when a firm or division has limited resources Soft rationing – the limited resources are temporary, often/

9-66 Evaluating NPV Estimates NPV estimates are only estimates Forecasting risk: –Sensitivity of NPV to changes in **cash** **flow** estimates The more sensitive, the greater the forecasting risk Sources of value Be able to articulate why this project creates value 9-67 Scenario **Analysis** Examines several possible situations: –Worst case –Base case or most likely case –Best case Provides a range of/

net income; if not, the reasons need to be investigated CFO composition & trends over time may signal possible earnings management Taxes paid & stock options require additional **analysis** Non-recurring items & special charges are subject to different **cash** **flow** reporting & require additional evaluation Additional Earnings Management Concerns Composition of CFI, normally negative, associated with acquisition of PPE; consider composition issues & possible impact on income/

under certain conditions. Sale of assets or operations that have historically not produced operating **cash** **flows** sufficient to fund future debt service and dividend expectations. **Analysis** Implications of Revenue Recognition (cont’d) Even when a company receives **cash** proceeds, any guarantees or other agreements requiring the company to infuse **cash** into the purchasing entity impacts the validity of revenue recognition. Revenue should not be recognized/

an organizations financial condition, make decisions about the organization, and compare an organizations financial performance to its peers. From **Cash** **Flow** to **Cash** Forecasting: Financial Statements **Analysis** of just financial statements rarely gives a final answer Rather, it indicates where further **analysis** is needed From **Cash** **Flow** to **Cash** Forecasting: Financial Statements Good organization management, regardless of the size of the organization, demands that the organization regularly review/

+ Depreciation – Taxes – (Change in CA) + (Change in CL) – Capital Spending OCF = EBIT + Depreciation – Taxes – (End CA – Beg CA) + (End CL – Beg CL) – Capital Spending 24 Depreciation & **Cash** **Flow** **Analysis** Because Depreciation is a non-**cash** expense that has **cash** **flow** implications, we must use the IRS rules for depreciation, Not GAAP Rules. Modified Accelerated Cost Recovery System (MACRS). – We will look at somewhat simplified MACRS tables/

-2 Fund **Analysis**, **Cash**-**Flow** **Analysis**, and Financial Planning u **Flow** of Funds (Sources and Uses) Statement u Accounting Statement of **Cash** **Flows** u **Cash**-**Flow** Forecasting u Range of **Cash**-**Flow** Estimates u Forecasting Financial Statements u **Flow** of Funds (Sources and Uses) Statement u Accounting Statement of **Cash** **Flows** u **Cash**-**Flow** Forecasting u Range of **Cash**-**Flow** Estimates u Forecasting Financial Statements 7-3 **Flow** of Funds Statement **cash** **flow** statement Has been replaced by the **cash** **flow** statement (1989/

21 - 43 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Relevant **Cash** **Flow** **Analysis** Example What is the after-tax **cash** **flow** from current disposal of old equipment? Current disposal price$ 3,000 Tax savings on loss 18,800/$21,800 21 - 44 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Relevant **Cash** **Flow** **Analysis** Example New equipment: Current book value$225,000 Current disposal price is irrelevant Terminal disposal price (5 years) 0/

rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Copyright © 2000 by Harcourt, Inc. All rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Where: P/CF j = the price/**cash** **flow** ratio for firm j/

default-free government rate (even on a coupon bond) as the riskfree rate on all of the **cash** **flows** in a long term **analysis** will yield a close approximation of the true value. Aswath Damodaran15 Estimating Riskfree Rates in Jamaican $ / projects that the firm may have. The benefits that may not be captured in the traditional capital budgeting **analysis** include project synergies (where **cash** **flow** benefits may accrue to other projects) and options embedded in projects (including the options to delay, expand or/

to model: Future extensions to the system (it is a good development practice to include all known future extensions in the **analysis** model) Extended versions of the system (e.g., “Premium”, “Professional”) Possible extensions, which can be added or /) Customer Description Customer logs in, selects withdraw funds, enters amount, customer has fund, ATM has no **cash** Pre-conditions Welcome screen is on **Flow** of Events A1. Customer slides card in and out S1. Machine prompts customer for password A2. Customer enters/

amount as the after-tax operating income. Aswath Damodaran56 The Statement of **Cash** **Flows** Aswath Damodaran57 The Financial perspective on **cash** **flows** In financial **analysis**, we are much more concerned about **Cash** **flows** to the firm or operating **cash** **flows**, which are before **cash** **flows** to debt and equity) **Cash** **flows** to equity, which are after **cash** **flows** to debt but prior to **cash** **flows** to equity Aswath Damodaran58 Fundamentals of Valuation Aswath Damodaran59 Discounted Cashflow Valuation/

in the other working capital components. The discount rate is 8%. What is the NPV of the project? Capital Budgeting & Uncertainty Uncertainty in **cash** **flows** adjust **cash** **flows** adjust discount rate (risk premia) **Cash** **flow** **analysis** (sensitivity **analysis**, scenario **analysis**, simulations) Decision trees Break even **analysis** **Cash** **Flow** **Analysis** Sensitivity **Analysis** Sensitivity **analysis** examines the sensitivity of the decision rule (NPV, IRR, etc.) to changes in the assumptions underlying a project. Sensitivity/

[PVA.30,2 ] + $2,111,000[PV.30,3 ] = $16,476Decision: Accept. Risk and Capital Budgeting “Various Methods to Handle Projects with Different Risk: Sensitivity **Analysis** and Break-Even **Analysis**” Lecture 7 - **Cash** **Flows** and Net Present Value SENSITIVITY **ANALYSIS** Vary some assumptions about the economy or industry (say oil prices) and find the effects on CFs and NPVs This is a way to force/

the next earnings report –While many analysts forecast expected growth in earnings per share over the next 5 years, the **analysis** and information (generally) that goes into this estimate is far more limited. Analyst forecasts of earnings per share and/ traded firm potentially has an infinite life. The value is therefore the present value of **cash** **flows** forever. Since we cannot estimate **cash** **flows** forever, we estimate **cash** **flows** for a “growth period” and then estimate a terminal value, to capture the value at/

-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 16-1 Reporting the Statement of **Cash** **Flows** Chapter 16 © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 16-2 Learning objectives 1.Basics of **Cash** **flow** reporting 2.**Cash** **flow** from operating 3.**Cash** **flow** from investing 4.**Cash** **flow** from financing 5.Interpretation of Statement of **Cash** **flow** 6.Decision **analysis**: **Cash** **flow** on total assets © The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin/

rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Copyright © 2000 by Harcourt, Inc. All rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Where: P/CF j = the price/**cash** **flow** ratio for firm j/

David E. Allen and Abhay K. Singh Relevant **cash** **flows** The **cash** **flows** that should be included in a capital budgeting **analysis** are those that will occur only if the project is accepted. These **cash** **flows** are called incremental **cash** **flows**. The stand-alone principle allows us to analyse each/ 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Scenario **analysis** What happens to the NPV under different **cash** **flow** scenarios? At the very least, look at: Best case—revenues are high and costs are low /

–Marketing Cost drivers –Fixed, variable or semi-variable –Scale of fixed cost base –Anticipated changes to cost drivers Investment **Analysis** Maximum financing need Timing of **cash** **flow** breakeven Timing to positive **cash** **flow** Success Factor **Analysis** Identify the business factors with the greatest impact on the **cash** **flows** –An anticipatory business scorecard Building a Financial Plan Sales forecast –Two to three years –Detailed assumptions Sales per customer Number/

rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Copyright © 2000 by Harcourt, Inc. All rights reserved The Price-**Cash** **Flow** Ratio Companies can manipulate earnings **Cash**-**flow** is less prone to manipulation **Cash**-**flow** is important for fundamental valuation and in credit **analysis** Where: P/CF j = the price/**cash** **flow** ratio for firm j/

used in relation to stock price. Some drawbacks, in that sales do not necessarily produce profit and positive **cash** **flows** Advantage is that sales are also less susceptible to manipulation The steps are similar to using the P/E ratio V =S 1 x(P/S) Company **Analysis**: Examining Influences Company **analysis** is the final step in the top- down approach to investing Macroeconomic/

plan that does not always imply final approval of a project. Final approval is often contingent upon a more detailed **cash** **flow** **analysis** in the appropriation request. Capital Budgets and Spending Not all large investments are part of the capital budget Information Technology/estimate Example problem Using the same data as before, assume that the firm decided to calculate a scenario **analysis**. Both cost of capital and **cash** **flows** will vary by 10%. The best case has a 25% probability, the base a 50% probability /

to get a measurement of country risk in the discount rate. –Use the country risk adjustment in the **cash** **flows** (and adjust discount rate down accordingly). –Use Monte Carlo methods on **cash** **flows** rather than **cash** **flows** and discount rate. Risk **Analysis** and Project Evaluation Risk **Analysis** and Project Evaluation 1. **Cash** **Flow** vs. Discount Rate Many different approaches: 1.Identical Cost of Capital (all locations) 2.World CAPM or/

Semih Yildirim ADMS 3530 8 - 1 Chapter 8 Using Discounted **Cash** **Flow** **Analysis** Chapter Outline Discount **Cash** **Flows**, Not Profits Discount Incremental **Cash** **Flows** Discount Nominal **Cash** **Flows** by the Nominal Cost of Capital Separate Investment and Financing Decisions Calculating **Cash** **Flow** Business Taxes in Canada and the Capital Budgeting Decision Example: Blooper Industries Semih Yildirim ADMS 3530 8 - 2 Discount **Cash** **Flows** not Profits In Chapter 6 you learned to evaluate a project/

Financial Statements Statement of **Cash** **Flows** **Cash** Inflow - **Cash** Outflow = Change in **Cash** From Investing: Sale of Fixed Assets + Purchase of fixed assets - Purchase of other firms - **Cash** Inflow - **Cash** Outflow = Change in **Cash** Statement of **Cash** **Flows** **Cash** Inflow - **Cash** Outflow = Change in **Cash** From Financing: Sale of/ = Margin Net Income Sales $162 $1,450 Net Profit Margin = = 11.2% Ratio **Analysis** Profitability Ratios Net Income Return on Assets = Total Assets How effectively is the firm generating net income/

the next earnings report While many analysts forecast expected growth in earnings per share over the next 5 years, the **analysis** and information (generally) that goes into this estimate is far more limited. Analyst forecasts of earnings per share /publicly traded firm potentially has an infinite life. The value is therefore the present value of **cash** **flows** forever. Since we cannot estimate **cash** **flows** forever, we estimate **cash** **flows** for a “growth period” and then estimate a terminal value, to capture the value /

and the Evaluation Process uExpansion projects F initial investment outlays required F estimate the **cash** **flows** once production begins F terminal **cash** **flow** **Cash** **Flow** Estimation and the Evaluation Process uReplacement **analysis** F must consider **cash** **flow** from old asset and new asset in decision F **cash** **flows** from the new asset take the place of **cash** **flows** from the old asset Capital Budgeting Evaluation Techniques u1. Payback u2. Net present value (NPV/

, and financing depending on the sources of that tax. 49 12-A1: **Cash** **Flow** **Analysis** 50 Analyzing **Cash** Sources and Uses A1 Most managers stress the importance of understanding and predicting **cash** **flows** for business decisions. 51 Used, along with income-based ratios, to assess company performance. **Cash** **flow** on total assets = Operating **cash** **flows** Average total assets **Cash** **Flow** on Total Assets A1 52 12-P4: Spreadsheet Preparation of the Statement/

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