Operating cash flows rather than accounting profits are listed in Table 12-1. Why do we focus on cash flows as opposed to net income in capital budgeting?

Table 12-1:

Transcribed Image Text:

A Н 15 Part 1. Input Data 16 17 Building cost (= Depr'n basis) 18 Equlpment cost (– Depr'n basls) 19 Net Operating WC 20 First year sales (in units) 21 Growth rate In unlts sold 22 Sales price per unit 23 Variable cost per unit 24 Fixed costs $12,000 $8,000 $6,000 20,000 0.0% $3.00 $2.10 $8,000 $7,500 $2,000 40% Market value of building in 2010 Market value of equip. in 2010 Tax rate WACC 12% Inflation: growth in sales price Inflation: growth in VC per unit Inflation: growth in fixed costs 0.0% 0.0% 0.0% 25 Years 26 Part 2. Depreciation Schedule a 2008 2009 2010 2007 27 | 28 Building Depr'n Rate | 29 Building Depr'n Expense 30 Cumulative Depr'n 31 Ending Book Value: Cost – Cum. Depr'n | 32 Equlpment Depr'n Rate 33 Equipment Depr'n Expense 34 Cumulative Depr'n 35 Ending Book Value: Cost - Cum. Depr'n The indicated percentages are multiplied by the depreciable basis ($12,000 for the building and $8,000 for the equlpment) to detemlne the depreclatlon expense for the year. 1.3% 2.6% 2.6% 2.6% $312 $1,092 $10,908 $156 $156 $11,844 $312 $468 $11,532 $312 $780 $11,220 20.0% 32.0% 19.0% 12.0% $2,560 $4,160 $3,840 $1,520 $5,680 $2,320 $960 $6,640 $1,360 $1,600 $1,600 $6,400 36 37