Beruflich Dokumente
Kultur Dokumente
Capital Expenditures refer to funds used by the company to acquire, upgrade, and
maintain physical assets such as PPE.
CapEx is often used to undertake new projects or investments by the firm. It can include
everything from repairing a roof to building, to purchasing a piece of equipment, or
building a brand new factory.
Capital Investment
Capital investment refers to funds invested in a firm or enterprise for the purpose of
furthering its business objectives.
The fourth step in the capital budgeting process is evaluating project proposals. Capital
investments are evaluated under certainty or risk.
Under certainty, the exact values associated with the investment, such as the cash flows
and the required rate of return, are known in advance.
Under risk, variables required for evaluating investment proposals are not certain and
involve a margin of error.
Income Taxes
Most firms, other than not-for-profit entities and government agencies, must pay income
taxes.
Firms that pay income taxes must consider the effect of these taxes on cash flows.
Revenues and related cash inflows generated by an investment increase taxable income
and therefore the taxes must be paid.
Expenses and the related cash outflows reduce taxable income.
Example:
Management established a required rate of return of 10 percent for this proposal. The
company’s tax rate is 40 percent.
The tax rate for Scientific Products, Inc., is 40 percent. Thus net cash receipts (revenue
cash inflows minus expense cash outflows) are multiplied by 0.60 (= 1 – 0.40).
Depreciation. Although depreciation expense is not a cash outflow, it does reduce
taxable income and thereby reduces taxes that are paid
The term used to describe this tax savings is depreciation tax shield.
Inflation
Real Pesos: The amount the future cash flow will be if the inflation rate is zero. [If there
is inflation, then nominal the cash flow will be higher.]
Nominal Pesos: The amount the cash flow will be, allowing for inflation. This is the
actual dollars to be received at a future date.
Rn = (1 + Rr)(1 + i) − 1
rn = (1 + rr)(1 + i) − 1
rn = Rn(1 − t)
rr = Rr(1 − t) − it /(1 + i)
Nominal rate = (1 + Real rate) × (1 + Inflation rate) − 1
Scenario Analysis
Involves the determination of what happens to NPV estimates when we ask what-if
questions
For example:
o What if unit sales realistically should be projected at level XXX units instead of
XX units?
Scenario Analysis
Starting point is the worst-case or pessimistic scenario that shows the lower bounds or
minimum NPV of the project
Then go ahead to the other extreme, the best case or optimistic scenario
Sensitivity Analysis
Simulation Analysis
Combination of scenario and sensitivity analysis
Beta Estimation
Involves concept of Capital Asset Pricing Model (CAPM)
Beta is a measure of the systematic risk of a project