Ebook Fundamentals of financial management (12E): Part 2
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Ebook Fundamentals of financial management (12E): Part 2
Home DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2f 1990, HD had 118 stores with annual sales of $28 billion. By early 2008, it hail 2.234 stores and annual sales of $77 billion. Stockholders have benefited mightily from this growth as I lie stork's [XĨÍ e has increased from a split-adjusted $137 m 1990 to $40 in early 2007, or by 2,039%.I lowcvcr, Ebook Fundamentals of financial management (12E): Part 2 the more recent news has not been as good. In the face of a declining housing market, the company has struggled. In May 2ÍXXÍ, it announced the dosinEbook Fundamentals of financial management (12E): Part 2
g of 12 underperforming stores. Still, despite the poor housing market, the company continues to open new stores in areas It thinks the stores will doHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2 company perform a financial analysis to determine whether a potential store's expected cash flows will cover its costs.Home Depot uses information from its existing stores to forecast its now stores'364expected c ash flows. thus far, its forecasts (save been cxilslanding, hut there are always risks Ebook Fundamentals of financial management (12E): Part 2. First, a store's sales might be less than projected, especially if the economy weakens. Second, some of HD's Customers might bypass the store altogeEbook Fundamentals of financial management (12E): Part 2
ther and buy directly from manufacturers through the Internet Third, its new stores could 'cannibalize.* or take sales away from. Its existing stores.Home DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2ple, it recently rolled out its Expo Design Center chain, which offers one-stop sales and service for kitchen, bath, and other remodeling and renovation work and in 2OU7, It acquired a Chinese home improvement Cham to jump-start its operations in that nation.Rational expansion decisions require deta Ebook Fundamentals of financial management (12E): Part 2iled assessments of the forecasted cash flows, along with a measure of the risk that forecasted sales might not be realized. That information can thenEbook Fundamentals of financial management (12E): Part 2
be used to determine the risk-adjusted NPV associated with each potential project. In thisChapter 12 Cash Flow EstiChapter, we describe techniques foHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2l budgeting decisionsPUTTING THINGS IN PERSPECTIVEThe basic principles of capital budgeting were covered in Chapter 11. Given a project's expected cash flows, it is easy to calculate the primary decision criterion— the NPV as well as the supplemental criteria, IRR, MIRR, payback, and discounted payb Ebook Fundamentals of financial management (12E): Part 2ack. However, in the real world, cash flow numbers are not just handed to you—rather, they must be estimated based on information from various sourcesEbook Fundamentals of financial management (12E): Part 2
. Moreover, uncertainty surrounds the forecasted cash flows, and some projects are more uncertain and thus riskier than others. In this chapter, we reHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2cts are evaluated once they go into operation. Finally, we discuss techniques to use when evaluating mutually exclusive projects that have unequal lives.When you finish this chapter, you should be able to:•Identify "relevant" cash flows that should and should not be included in a capital budgeting a Ebook Fundamentals of financial management (12E): Part 2nalysis.•Estimate a project's relevant cash flows and put them into a time line format that can be used to calculate a project's NPV, IRR, and other cEbook Fundamentals of financial management (12E): Part 2
apital budgeting metrics.•Explain how risk is measured and use this measure to adjust the firm’s WACC to account for differential project riskiness.•CHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2stimation process is illustrated, we need to discuss several important conceptual issues. A failure to handle these issues properly can lead to incorrect NPVs and thus bad capital budgeting decisions.12-la Cash Flow versus Accounting IncomeWe saw in Chapter 3 that there is a difference between cash Ebook Fundamentals of financial management (12E): Part 2flows and accounting income. We also saw that cash is what people and firms spend or reinvest; so the present value of cash flows, not accounting incoEbook Fundamentals of financial management (12E): Part 2
me, Ls the basis of a firm’s value. Thai's why, in the last chapter, we discounted net cash flows, not net income, to find projects' NPVs.Many things Home DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2ted. Second, net income is based on the depreciation rate the firm's accountants decide to use, not necessarily on the depreciation rate allowed by the IRS, and it is the IRS rate that determines cash flows. Moreover, if a project requires an addition to working capital, this directly affects cash f Ebook Fundamentals of financial management (12E): Part 2lows but not net income. Other factors also differentiate net income from cash flow, but the366Part 4 Investing in Long-Term Assets: Capital BudgetingEbook Fundamentals of financial management (12E): Part 2
Incremental Cash FlowA cash flow that will occur if and only if the firm takes on a project.Sunk CostA cash outlay that has already been inclined and Home DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2oses, the project's cash flows, not its accounting income, is the key item.12-lb Timing of Cash FlowsIn theory, capital budgeting analyses should deal with cash flows exactly when they occur; hence, daily cash flows theoretically would be better than annual flows. However, it would be costly to esti Ebook Fundamentals of financial management (12E): Part 2mate and analyze daily cash flows, and they would probably be no more accurate than annual estimates because we simply cannot accurately forecast at aEbook Fundamentals of financial management (12E): Part 2
daily level out 10 years or so into the future. Therefore, we generally assume that all cash flows occur al the end of the year. Note, though, for prHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2purposes, we assume end-of-year flows.12-Ic Incremental Cash FlowsIncremental cash flows are flows that will occur if and only if some specific event occurs. In capital budgeting, tile event is the firm's acceptance of a project and the project's incremental cash flows are ones that occur as a resul Ebook Fundamentals of financial management (12E): Part 2t of this decision. Cash flows such as investments in buildings, equipment, and working capital needed for the project are obviously incremental, as aEbook Fundamentals of financial management (12E): Part 2
re sales revenues and operating costs associated with the project. However, some items are not so obvious, as we explain later in this section.12-ld RHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2, and replacement projects, where the firm replaces existing assets, generally' to reduce costs. For example, suppose Home Depot is considering replacing some of its delivery trucks. Tile benefit would be lower fuel and maintenance expenses, and the shiny new trucks also might improve the company's Ebook Fundamentals of financial management (12E): Part 2image and reduce pollution. Replacement analysis is complicated by the fact that almost all of the cash flows are incremental, found by subtracting thEbook Fundamentals of financial management (12E): Part 2
e new cost numbers from the old numbers. Thus, the fuel bill for a more efficient new truck might be $10,000 per year versus $15,000 for the old truckHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2iation and other factors that affect cash flows. Once we have found the incremental cash flows, we use them in a "regular" NPV analysis to decide whether to replace the asset or to continue using it.12-le Sunk CostsA sunk cost is an outlay that was incurred in the past and cannot he recovered in the Ebook Fundamentals of financial management (12E): Part 2 future regardless of whether the project under consideration is accepted. In capital budgeting, we are concerned with future incremental cash flows—wEbook Fundamentals of financial management (12E): Part 2
e want to know if the new investment will produce enough incremental cash flow to justify' the incremental investment. Because sunk costs were incurreHome DepotHome Depot Keeps GrowingHexTie I )ejx>t Irw. (HD) has grown phene XTienally in recent years, anil that growth continues. Al the beginning of Ebook Fundamentals of financial management (12E): Part 2is.Gọi ngay
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