Mini Case in Finance and Accounting Study Example | Topics and Well Written Essays - 1500 words

Mini in Finance and Accounting - Case Study ExampleThe incremental specie fuses constitute the marginal turn a profit from the project. Therefore, the incremental cash flows are the increased value to the firm from accepting the project. It is suitable to take the total free cash flow into account earlier than taking the total profits. b. bills flow items do not include depreciation. However, depreciation affects the cash flows at various levels on the look of the project as it has effects on taxes, which in turn impacts the cash flows (Business Accounting Guide). Depreciation comes under the expenses items and when the amount of depreciation incurred increases, the expenses also increase in proportion. On such a situation, the accounting profits get diminished. c. The drop costs are ignored while assessing the capital budgeting proposal. The company as a whole concentrates however on the incremental after-tax cash flows, or free cash flows. The decision made on the investme nt at hand is not regarded as the sunk cost that would have already incurred. They are irrelevant and are not incremental cash flows and so they do not affect the determination of cash flows. d. The projects initial cash outlay can be calculated by using the following formulae. Initial Cash Outlay = make up of new plant & equipment + Cost of shipping & installation + Increase in working capital = $7,900,000+ $100,000+$100,000 = $8,100,000 e. The differential cash flows over the projects life can be found out by adding Taxes to the amount of EBIT (Earning Before Interest and Taxes) and deducting the amount of Depreciation. The differential cash flows through the years are assessed as follows Operating Cash Flow Statement Year 1 2 3 4 5 EBIT $6,500,000 $12,500,000 $14,900,000 $7,700,000 $2,900,000 Less Taxes $2,210,000 $4,250,000 $5,066,000 $2,618,000 $986,000 Add Depreciation $1,600,000 $1,600,000 $1,600,000 $1,600,000 $1,600,000 Differential (Operating) Cash Flows $5,890,000 $9,850 ,000 $11,434,000 $6,682,000 $3,514,000 f. The Terminal Cash Flow means the cash flow that is accumulated at the end of the project life. It takes the net recovered value collected at the liquidation of the project into account. It consists of cash flow on account of the changes in net working capital but leaves out the operational cash flow from the previous year of the project. Usually, changes in the net working capital affect the cash inflow, which is the recovered amount of cash outflow taken into account at the starting of the project (Terminal Cash flow in capital budgeting decision, 2010). The Terminal Cash Flow is assessed using the following statement. Terminal Cash Flow = $5,914,000.00 reconcile Cash Flow Statement 1 2 3 4 5 Operating Cash Flow $ 5,890,000.00 $9,850,000.00 $11,434,000.00 $ 6,682,000.00 $ 3,514,000.00 Less Change in gain Working Capital $ 2,000,000.00 $1,500,000.00 $ 600,000.00 $(1,800,000.00) $(2,400,000.00) Less Change in Capital Spending $ - $ - $ - $ - $ - Free Cash Flow $