razor(刮胡刀).doc

8-5 Calculating Cash Flow (This section comes from undergraduates text book, Fundamentals of Corporate Finance) 3 components of a project cash flow:total cash flow = cash flow from investment in plant and equipment+ cash flow from investment in working capital+ cash flow from operations Capital Investment (or Investment in Plant and Equipment)Example 8-4: Slick invests $800 million to develop a razor(刮鬍刀) blade(刀片). The blade factory(廠房) will run 7 years. At year 7, the machinery will be sold for $50 million (i.e., a salvage value 殘值). Taxes of $10 million will be assessed on the sale. t=0 t=7 Capital Investment+$800-$40 (=$50-$10) Investment in Working CapitalExample 8-5: Slick makes investments in inventories. t=0 t=1 t=2 t=3 t=4t=5 t=6 t=7 Working Capital $10 $30 $30 $30 $30 $25 $25 $0Cash Outflows $10$20 $0 $0 $0 -$5 $0 -$25 point: An increase in working capital is an investment and implies a negative cash flow; a decrease in working capital implies a positive cash flow. = The cash flow is measured by the change in working capital, not the level of working capital. Cash Flow from Operations 3 methods to work out(解決、計算) this component: 1) Cash Flow from Operations = Revenue Cash Expenses Taxes a note: Depreciation is not a cash expense. 2) Cash Flow from Operations = After-Tax Profit + Depreciation 3) Cash Flow from Operations = (Revenue Cash Expenses) (1 tax rate) + (Depreciation tax rate) a note: depreciation tax shield (折舊稅盾，既折舊費用帶來的節稅) Although depreciation is not a cash expense, it does affect profits (shown on the Income Statement) and therefore taxes paid.If a firms tax bracket(稅級) is 35%, each dollar of depreciation reduces taxable income(課稅所得) by $1. Tax payments therefore fall by $0.35, and cash flow increases by the same amount.= depreciation tax shield = depreciation tax rate Example 8-6: a simple income statementRevenues$1,000- Cash Expenses 600- Depreciation Expense 200 Profit before tax $200- Tax at 35% 70 Net Income $130 method 1: Cash Flow from Operations = $1,000 - $600 - $70 = $330 method 2: Cash Flow from Operations = $130 + $200 = $330 method 3: Cash Flow from Operations = ($1,000 - $600) (1 0.35) + ($200 0.35) = $260 + $70 = $3308-6 A Complete Example: Blooper Industries Blooper is about to analyze for mining a small deposit of magnoosium ore(礦石). Table 8-1: accounting data for Bloopers projectI. Profit projections(預測) from Accounting Statements:01234 56 1. Capital Investment 10,0002. Salvage Value 1,3003. Working Capital1,5004,0754,2794,493 4,717 3,03904. Change in Working Capital1,5002,575 204 214 225 -1,679 -3,0395. Revenues15,00015,75016,53817,36418,2336. Cash Expenses10,00010,50011,02511,57612,1557. Depreciation2,0002,0002,0002,0002,0008. Pretax Profit3,0003,2503,5133,7884,0789. Tax at 35%1,0501,1381,2291,3261,42710. Profit after Tax1,9502,1132,2832,4622,651 II. Forecasts of Working Capital:0123456 11. Accounts Receivable (Revenues 2/12) 02,5002,6252,7562,8943,039012. Inventories (0.15 the following years expenses1,5001,5751,6541,7361,8230013. Working Capital(11+12)1,5004,0754,2794,4934,7173,0390 Notes:1) t=1 至 t=5 為計畫的營運期間；t=6 為計畫的結算、結束時點。2) line 2: The salvage value is the expected sales price at the end of the assets life.3) line 6: Cash Expenses = Expenses - Depreciation4) line 7: We assume straight-line depreciation(直線折舊) method and a salvage value of zero at the end of the assets depreciable life. = 帳面 價值為零。5) line 11: We have assumed that on average customers pay with a 2-month lags so that 2/12 of each years sales are not paid for until the following years. = 每年的revenues有2/12當年收不到錢。6) line 12: We assume that 15% of each year expenses is increased in the previous year when the company builds up an inventory of raw materials and finished product. Q: Could Blooper get those tax shields sooner so that they would be worth more? A: Tax law allows accelerated depreciation(加速折舊). Modified Accelerated Cost Recovery System (MACRS, 美國加速折舊制度)Table 8-4:加速折舊表 Recovery Period Class Year3-Year5-Year 133.33%20.00%244.45%32.00%314.81%19.20%47.41%11.52%511.52%65.76% the switch from straight-line to 5-year MACRS depreciation:1) straight-line depreciationYearDepreciationTax Shield at 35%PV of Tax Shield at 12%1 2,00070062522,00070055832,00070049842,00070044552,00070039760 0 0 Totals$10,000$3,500$2,5232) MACRS depreciationTax Shield PV of Tax ShieldYear5-Year MACRSDepreciation at 35% at 12% 120%2,000700625232%3,2001,120893