MGMT 610 – Financial Management Professor Boquist Homework #3 – 50 Points Total **Due by 11:59PM on due date Reminder: upload your file on Brightspace. Please use the spreadsheet I posted...

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Answered 10 days AfterSep 09, 2022

Answer To: MGMT 610 – Financial Management Professor Boquist Homework #3 – 50 Points Total **Due by 11:59PM on...

Hari Kiran answered on Sep 19 2022
76 Votes
Introduction
        Types of Cash Flows of a Project
        (i) Initial Investment or Cash Flows
        these include the After tax Capital Expenditure and Incremental Net Working Capital incurred at the beginning of the project.
        (a) Capital Expenditure includes:
         - Orignial Cost of New Assets, installation
expenses and Freight.
         - Cost of Ancillary services and Equipments.
         - Preliminary Expenses like Brokerage, Commission, Legal Charges Etc.
         - Other Incidental Expenses like cost of delay in procurement, installation, Etc.
        In case of Replacement, salvage value (after tax) realised from the old asset is deducted from the Initial Investment.
        We should ignore Sunk Costs. these are the costs already incurred prior to beginning of the project and are not recoverable. Sunk Costs are irrelevant for the future and hence should not be included in the Initial Cash Flows.
        (b) Incremental Net Working Capital
        Apart from Capital expenditure, a Project also brings about an increase in the use of Working Capital like increase in Debtors for Sales, increase in Creditors for Purchases, Cash requirement for day to day Project Expenditure Etc.
        Initial Cash Flow = + Cost of New Assets and Ancillary services and + Installation Cost + Other Incidental Expenses
                 - Salvage Value of Old Asset +/- tax Benefit / Liability on account of Profit or Loss on Sale of Old Asset
                 + Incremental Net Working Capital
        (a) Operating Cash Inflows
        these represent the net figure of operating cash expenses and incomes arising due to the project.
        these cash flows may be constant or may vary throughout the life of the project.
        Operating Cash Flows are calculated by adding Non-Cash Expenses and Finance Charge net of tax to the Profit after tax from the project.
        Operating Cash Inflows = Earnings Before interest and tax (1- tax rate) + Depreciation
        (c) Changes in Working Capital
        Increase in Working Capital will be considered as Cash Outflow and decrease in Working Capital will be considered as Cash Inflow.
        these cash outflows and cash inflows are adjusted to profit to get cash inflows.
        Subsequent Cash Flows = Profit After tax + Depreciation + Finance Charge (1-tax)
                 - Subsequent Capital Expenditure and Periodic repairs
                 +/- Decrease / Increase in Working Capital
                 +/- Subsequent Cash Inflows / Outflows
        (iii) Terminal Cash Inflows
        These represent the last year's Cash Inflow at the end of the Economic life of the project.
        Terminal Cash Inflows includes:
        (a) Operating Cash inflows
        this is the Annual Cash Inflow for the last year of the project life.
        (b) After tax Salvage Value of the Project
        At the end of Project life all assets related to it are sold off at Market Price. If the assets are sold at Profit, tax Liability arises; otherwise, tax Benefit.
         (c) Working Capital Released
        Net working capital invested in the project, is released at its book value at the end of the project which forms a part of terminal...
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