Oleh:

1. Afif Linofian Mukminin

2. Agil Said Aqil
3. Agustinus Limbong
4. Almas Nizar Bahrak
5. Andrew Bintang Sudibyo
6. Anisa
7. Arhandi Munandar
13.1 Conceptual Issues in Cash Flow Estimation

Free Cash Flow vs Accounting Income

Timing of Cash Flows

Incremental Cash Flow

Replacement Project

Sunk Cost

Opportunity Costs Associated With Assets the Firm Owns

13-2 Analysis of an Expansion Project
analysis method to project how an expansion of a project can affect cash flow
statement of a company.

Example : Allied Company introduce new health-food product in project S

● Purchase of new asset

Changes in Net Working Operating Capital
Depreciation Rates
Cannibalization
Opportunity costs
Sunk Costs
 1. Purchase of new asset
Changes in Net Working Operating Capital

Depreciation Rates
accelerated
straight line

Cannibalization?
No

Opportunity Costs?
$78.82 - $100 = -$21.18

Sunk Costs?
$150 on marketing study costs
13-3 Replacement Analysis

• How existing/ current Project Cash Flow?

• How the Cash flow of the project if we replace an assets?

• Do we replace or not ? Can we sell/ salvage the old

machine?

Key Point:
Finding the differential between existing/ current cash flow and
new cash flow = Incremental Cash Flow
Incremental Cash Flow

FCF after Replacement

= EBIT (1-T) + Depreciation – Capex - ∆ Net Operating Working Capital

MINUS

FCF before Replacement

= EBIT (1-T) + Depreciation – Capex - ∆ Net Operating Working Capital

Example

Calculation Table in Excel

Assumptions
∆Net working Capital is Zero in both
scenario
13-4 Risk Analysis in Capital Budgeting

• Project differ in risk and risk should be reflected in

capital budgeting
• Difficulties to measure new projects risk where no
history exists
 Stand-alone
risk Corporate,
or within-
Market or beta
firm, risk
risk

1
2
3

Three separate and distinct types of risk

RISK MEASUREMENT
13-5 Measuring Stand-Alone Risk

- Sensitivity Analysis
THREE TECHNIQUES ARE USED
- Scenario Analysis TO ASSESS STAND-ALONE RISK
- Monte Carlo Simulation
13-5a Sensitivity Analysis
Percentage change in NPV
resulting from a given
percentage change in an
input variable, other things
held constant.

List of the key inputs for

Project S:
1. Equipment Cost
2. Change in net
operating working
capital
3. Unit sales
4. Sales price
5. Variable cost per unit
6. Fixed operating costs
7. Tax rate
8. WACC
13-5b Scenario Analysis
A risk analysis technique
in which “bad” and
“good” sets of financial
circumstances are
compared with a most
likely, or base-case,
situation.

- Base-Case Scenario
- Worst-Case Scenario
- Best-Case Scenario
13-5c Monte Carlo Simulation
“A risk analysis technique in which probable future
events are simulated on a computer, generating
estimated rates of return and risk indexes”
Histogram of Results
Monte Carlo Simulation Analysis
• A computerized version of scenario
analysis which uses continuous
probability distributions
• Computer selects values for each
variable based on given probability
distributions
• NPV and IRR are calculated
• Process is repeated many times
(1,000 or more)
• End result: Probability distribution
of NPV and IRR based on sample
of simulated values
• Generally shown graphically
Global Perspectives
Techniques for Evaluating Corporate Projects Techniques for Assessing Risk

Techniques for Estimating the Cost of Equity Capital

13 – 6. Within Firm and Beta Risk

Within Firm Risk Subjective

and or

Beta Risk Judgmentally

Key Highlight :
- The calculation of Stand Alone Risk will be the consideration for Within Firm Risk
and Beta Risk
- Correlation coefficient between project’s returns and returns on the firm’s other
assets
13 – 6. Within Firm and Beta Risk

Conclusion:
1. Hard to define the measurement of Within Firm Risk and Beta Risk for each
project.
2. The returns of each project have a positive correlation with asset and stock
market. It happens because there is a correlation between stand alone risk and
within firm & beta risk.
3. Judgmental assessment is being used by the manager to create capital
budgeting. The quantitative measurement (NPV) also becomes one
consideration while deciding a project.
4. All the variable calculation method should be used instead of computerized
calculation.
 Example

13.7 Unequal
Project Lives
When mutually-exclusive projects have
unequal useful lives, capital budgeting
decision is made based on annual net
present value (also called equivalent
annual annuity) method or replacement
chain method.

a. Traditional Analysis
b. Replacement Chain adjustment
c. Equivalent Annual Annuity (EAA) Method
d. Conclusion Unequal Lives