Ninth edition pandey vikas publishing house pvt

Chapter - 10

Investment Analysis

profit and cash flow.

 Discuss the approach for calculating incremental cash flows.

Introduction

 Second, for computing profit, expenditures are arbitrarily divided into revenue and capital

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Components of Cash Flows

 Salvage value of the existing asset now

 Salvage value of the existing asset at the end of its normal

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 As per the current tax rules in India, the after-tax

salvage value should be calculated as follows:

Cash Flow Estimates for Replacement

Decisions
 The initial investment of the new machine will be reduced by the cash proceeds from the sale of the existing machine:

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Additional Aspects of Incremental

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Investment Decisions Under Inflation

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 either the cash flows should			1
be converted into nominal
terms and then discounted at
the nominal required rate of
return, or
 the discount rate should be
converted into real terms and
used to discount the real cash
flows.

 The adjustment for the financing effect is made in the discount rate. The firm’s weighted average cost of capital (WACC) is used as the discount rate.

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