Fundamentals-of-Capital-Budgeting(上财-公司金融).pdf

Lecture 5: Fundamentals of Capital Budgeting Outline 5.1 Forecasting Earnings 5.2 Determining Free Cash Flow and NPV 5.3 Analyzing the Project 2 5.1 Forecasting Earnings  Capital Budget  Lists the investments that a company plans to undertake  Capital Budgeting  Process used to analyze alternative investments and decide which ones to accept  Incremental Earnings  The amount by which the firm’s earnings are expected to change as a result of the investment decision 3 Accounting Statements and Cash Flow 4 Revenue and Cost Estimates  Example  Linksys has completed a $300,000 feasibility study to assess the attractiveness of a new product, HomeNet. The project has an estimated life of four years.  Revenue Estimates  Sales = 100,000 units/year  Per Unit Price = $260 5 Revenue and Cost Estimates (cont'd)  Example  Cost Estimates  Up-Front R&D = $15,000,000  Up-Front New Equipment = $7,500,000  Expected life of the new equipment is 5 years  Housed in existing lab  Annual Overhead = $2,800,000  Per Unit Cost = $110 6 Incremental Earnings Forecast 7 Capital Expenditures and Depreciation  The $7.5 million in new equipment is a cash expense, but it is not directly listed as an expense when calculating earnings. Instead, the firm deducts a fraction of the cost of these items each year as depreciation.  Straight Line Depreciation  The asset’s cost is divided equally over its life. Annual Depreciation = $7.5 million / 5 years = $1.5 million/year 8 Interest Expense  In capital budgeting decisions, interest expense is typically not included. The rationale is that the project should be judged on its own, not on how it will be financed.  Indeed, we account for the time value of money by discounting. 9 Interest Expense (cont’d) Example: