CAPITAL BUDGETING

CHAPTER 9

NPV, IRR, Payback,

Profitability

CHAPTER 10

Determine and
Project Relevant
Cash Flows, CCA

CHAPTER 11

Evaluating and
Analyzing Cash
Flows/Investments

Chapter
10

OCF = EBIT + Depreciation - Taxes

EBIT = Sales Costs Depreciation
Chapter
11

Fixed Costs

Variable Costs

T Shirt Investment Opportunity

5 year business

$1000
$100 FC
$10
VC
$5
VC

$20

Initial Investment
Shop rent, hydro, etc
Materials charge per t-shirt
Labour charge per t-shirt
Selling Price per t-shirt

Financial Break Even

5 years, 10%

-1000

? OCF

-1000 =
10
=
11
=
COMP =

? OCF

PV
I
N
PMT

? OCF

? OCF

? OCF

Financial Break Even

5 years, 10%

-1000

263.80

-1000 =
10
=
11
=
COMP =

263.80

PV
I
N
263.80

263.80

263.80

263.80

BREAK EVEN ANALYSIS

Common tool for analyzing the
relationship between sales volume and
profitability
Cash break-even:
sales volume where operating cash flow = 0

Accounting break-even:
sales volume where net income = 0

Financial break-even:
sales volume where net present value = 0

OPERATING LEVERAGE
Operating leverage is the relationship
between sales and operating cash flow
The Degree of Operating Leverage
measures the percentage change in
operating cash flow relative to the
percentage change in quantity sold
For each 1% increase in unit sales, OCF
will increase by 2%