Income Estimation Chapter 7 in the book

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Venture Cash Estimation. Essentialness of Cash Flows and Cash Flow EstimationThe idea of

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Slide 1

Income Estimation Chapter 7 in the book Financial Policy and Planning (MB 29)

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Project Cash Estimation Significance of Cash Flows and Cash Flow Estimation The idea of "applicable" versus "immaterial" money streams Points to watch in evaluating money streams How to gauge extend working money streams? How to gauge extend add up to money streams? Assessing Project with Unequal lives

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Cash Flows To be predictable with riches amplification standard, an assessment of a venture must be founded on money streams and not on bookkeeping benefits To have the capacity to utilize NPV method or some other procedure of capital planning examination effectively and precisely, we should have a fair gauge of the normal future money streams of the venture including time to fulfillment and gauge introductory speculation/cost—critical and most troublesome assignment

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Projects have fizzled or prevailing because of mistaken or right gauges of the money streams of the venture. In the event that income assessments are mistaken, it doesn't make a difference which method we utilize, the venture is bound to come up short

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"Applicable" versus "Unimportant" Cash Flows The consequences of an acknowledgment of a venture is to change the money streams of a firm. Money streams of a firm that change as a result of the venture are called "pertinent" money streams; any money streams that does not change independent of the acknowledgment/dismissal of the venture is "insignificant" to basic leadership and ought not be considered.

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Points of Consider Sunk Costs Opportunity Costs Project Externalities Change in Net Working Capital

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Sunk Costs Sunk Costs—A cost that has as of now been caused and can't be recouped regardless of the choice to acknowledge or dismiss the venture. Is it applicable or superfluous? R&D, Market Research, Consultant's Fees

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Opportunity Costs Opportunity Costs- - The income inescapable by utilizing your assets especially. Assets have various utilizations You can utilize them in one route to the prohibition of different uses and this offers ascend to circumstance costs By utilizing your own working for your business, you forego the lease that you could have earned by leasing it to another person. Is it important or immaterial to basic leadership?

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Project Externalities Project Externalities- - the impact of another venture (positive or negative) on a current venture or division of a firm. For example, presentation of another model of an auto on other existing models delivered by a similar firm. Is it important or immaterial to basic leadership?

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Net Working Capital Change in Net Working Capital- - Net working capital is characterized as present resources short current liabilities. Any positive change in Net Working Capital specifically year implies interest in working capital is required for that specific year, prompting to money surges for that year. Negative change in net working capital in a specific year implies less interest in working capital in contrast with earlier year, which implies interest in working capital will go down, prompting to some money inflow for that specific year

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Net Working Capital Any interest in working capital is a money inflow amid the most recent year of the venture and should be dealt with as needs be

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Estimating Project Cash Flows Total Cash Flows of a Project in year t, where t ranges from year 0 to year n. = Project Operating Cash Flows for that specific year – change in Net Working Capital – introductory speculation There is no venture working money streams for year 0

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Estimating Project Operating Cash Flows Cash streams from operations for any year Estimated Sales Revenue ***** Total Costs ***** Variable Costs *** Fixed Costs per year *** Depreciation *** Sales Revenue short Total Costs = Earnings Before Interest and Taxes (EBIT) Deduct Taxes from EBIT *** Net Income ***

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Operating Cash Flows = Net Income + Depreciation OR = EBIT – Taxes + Depreciation

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Evaluating Projects with Unequal Lives Replacement Chain Analysis Equivalent Annual Cost Method If two machines are unequal in life, we have to make conformity before figuring NPV.