BADM
710
-
Chapter
6
After
Tax
Salvage
Value
-
ANS--
EOL
Market
value
-
Tax
Rate
(EOL
Market
Value
-
EOL
Book
Value)
Bottom-up
Approach
to
finding
OCF
-
ANS--
OCF
=
NI
+
Depreciation
-
ONLY
works
when
theres
no
interest
expense
CFs
=
OCF
-
Net
Capital
Spending
-
Change
in
Net
Working
Capital
OCF
=
EBIT
-
Taxes
+
Depreciation
-
ANS-
Depreciation
tax
shield
-
ANS--
Portion
of
an
investment
that
can
be
deducted
from
taxable
income
Erosion
(Bad)
-
ANS--
Cash-flow
amount
transferred
to
a
new
project
from
customers
and
sales
of
other
products
of
the
firm.
How
is
a
Cash
Flow
Considered
Incremental?
-
ANS--
The
cash
flow
only
occurs
if
and
only
if
the
project
is
undertaken
Interest
Expense
-
ANS--
Interest
expense
is
a
financing
decision
not
an
operating
decision.
We
should
be
worried
about
a
project
having
a
positive
NPV
THEN
worry
about
financing
Jamestown
Ltd.
currently
produces
boat
sails
and
is
considering
expanding
its
operations
to
include
awnings.
The
expansion
would
require
the
use
of
land
the
firm
purchased
three
years
ago
at
a
cost
of
$142,000
that
is
currently
valued
at
$137,500(USE).
The
expansion
could
use
some
equipment
that
is
currently
sitting
idle
if
$6,700(USE)
of
modifications
were
made
to
it.
The
equipment
originally
cost
$139,500
six
years
ago,
has
a
current
book
value
of
$24,700,
and
a
current
market
value
of
$39,000(USE).
Other
capital
purchases
costing
$780,000(USE)
will
also
be
required.
What
is
the
amount
of
the
initial
cash
flow
for
this
expansion
project?
-
ANS--
$963,200
137,500+6,700+39000+780000=
963,200
Marshall's
purchased
a
corner
lot
five
years
ago
at
a
cost
of
$498,000
and
then
spent
$63,500
on
grading
and
drainage
so
the
lot
could
be
used
for
storing
outdoor
inventory.
The
lot
was
recently
appraised
at
$610,000
(USE).
The
company
now
wants
to
build
a
new
retail
store
on
the
site.
The
building
cost
is
estimated
at
$1.1
million
(USE).
What
amount
should
be
used
as
the
initial
cash
flow
for
this
building
project?
-
ANS--
1,710,000
61,0000+1,100,000=1,710,000
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