Chapter 8

Fundamentals of
Capital Budgeting
Chapter Outline
8.1 Forecasting Earnings
8.2 Determining Free Cash Flow and NPV
8.3 Choosing Among Alternatives
8.4 Further Adjustments to Free Cash Flow
8.5 Analyzing the Project

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Learning Objectives
1. Given a set of facts, identify relevant cash flows for a capital
budgeting problem.
2. Explain why opportunity costs must be included in cash flows,
while sunk costs and interest expense must not.
3. Calculate taxes that must be paid, including tax loss
carryforwards and carrybacks.
5. Calculate free cash flows for a given project.
6. Illustrate the impact of depreciation expense on cash flows.
7. Describe the appropriate selection of discount rate for a particular
set of circumstances.
8. Use breakeven analysis, sensitivity analysis, or scenario analysis
to evaluate project risk.

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几个基本原则

• 以项目为核心
• 要使用项目的现金流、项目的资本结构和项目的资本成本
• 要在既定的项目风险水平上对现金流进行贴现。
• Q：何时可以用公司的风险水平进行贴现？

• 现金为王
• 切记：用收入买茅台，用现金买啤酒
• 估值是前瞻性的，是看未来 (看现金流！)
• 公司可以长时间维持亏损，但如果现金不足将迅速死亡
• 亚马逊在创建后的 8 年时间里，累积亏损近 30 亿美元
• 在互联网泡沫期间，互联网公司能否熬浩劫，完全取决于他们烧钱的速
度，也就是说公司会在多长时间内耗尽现金。

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净现值准则的应用——现金流

准则1：只有现金流量才相关
• 净现值是由现金流量决定的
• 估计税后现金流量
• 现金流量只有在实际发生时才会被记录 (时间价值)
• 例如，对于应收账款，应该在实际收到时再进行
折现，why？

扩展阅读：Asquith，公司金融, chp 16；Damodaran (2012, ACF，chp 5)

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净现值准则的应用——现金流

• 要点1：附带效应 • 要点3：沉没成本
• 商场中的免费儿童乐园 • 前期市场调研费用

• 为新项目配套的火车轨道： • 规则：那些不随项目进展而变化的现金流，
都不要纳入我们的考虑范围。
是否专用
• 要点4：放弃成本/残值
• Def：项目结束时的现金流
• 要点2：侵蚀效应 (机会成本)
• Case1: 煤矿关闭时的回填成本；工厂关
• Q5 v.s. Q5L
闭时尚未偿付的退休或医疗保险费用。
• Q3 v.s. Q5
• Case2：项目结束时机器和厂房可以出售

扩展阅读：Asquith，公司金融, chp 16；Damodaran (2012, ACF，chp 5)

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• Source: 武汉海特生物制药招股说明书， 2017.5.3，
http://www.csrc.gov.cn/pub/zjhpublic/G00306202/201705/P020170503553577287628.pdf, pp.48
7
Ø Source: 武汉海特生物制药招股说明书， 2017.5.3，
http://www.csrc.gov.cn/pub/zjhpublic/G00306202/201705/P020170503553577287628.pdf, pp.418

8
• https://static.sse.com.cn/disclosure/listedinfo/announcement/c/new/2024-10- 9

17/603205_20241017_C9X9.pdf
10
上海菲林格尔木业股份有限公司招股说明书

http://www.csrc.gov.cn/pub/zjhpublic/G00306202/201704/P020170428379599683612.pdf,
pp.343

11
603310 巍华新材首次公开发行股票并在主板上市招股说明书

12
更多 IPO 招股说明书

https://www.sse.com.cn/ipo/disclosure/

13
8.1 Forecasting Earnings
• Capital Budget
• Lists the investments that a company plans to undertake
• Capital Budgeting
• Process used to analyze alternate investments and decide which
ones to accept
• Incremental Earnings
• The amount by which the firm’s earnings are expected to change
as a result of the investment decision

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Revenue and Cost Estimates
• Example
• Linksys has completed a $30w feasibility study to assess the
attractiveness of a new product, HomeNet.
• The project has an estimated life of four years.
• Revenue Estimates
• SalesQ = 10W units/year； Per Unit Price = $260; Sales=2600w

• Cost Estimates
• Up-Front R&D = $1500w = 500w + 50人*$20w/人；
• Up-Front New Equipment = $750w
• Expected life of the new equipment is 5 years
• Straight-line depreciation: $150w/year
• Annual Overhead (市场营销和服务支持等) = $280w
• Per Unit Cost = $110, Costs = $1100w

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Incremental Earnings Forecast
Table 8.1 Spreadsheet HomeNet’s Incremental Earnings
Forecast

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Capital Expenditures and Depreciation
• The $7.5 million in new equipment is a cash expense, but
it is not directly listed as an expense when calculating
earnings.
• Instead, the firm deducts a fraction of the cost of these
items each year as depreciation.
• Straight Line Depreciation
• The asset’s cost is divided equally over its life.
Annual Depreciation = $7.5 million ÷ 5 years = $1.5 million/year

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Interest Expense

• In capital budgeting decisions, interest expense is

typically not included.
• The rationale is that the project should be judged on its
own, not on how it will be financed.
• Right？
• Now： Unlevered net income
• Chp18: levered net income

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Taxes

• Marginal Corporate Tax Rate

• The tax rate on the marginal or incremental dollar of pre-tax
income.
• Note: A negative tax is equal to a tax credit (税收抵免).

Income Tax  EBIT   c

• Unlevered Net Income (UNI) Calculation

UNI  EBIT  (1   c )
 (Revenues  Costs  Depreciation)  (1   c )

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Textbook Example 8.1

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Textbook Example 8.1
问题
• 凯洛格公司计划推出一款新的高纤维、零反式脂肪的早餐糕点。与新产品发布
相关的大量广告费用预计会导致该产品在明年产生 1500 万美元的运营亏损。
凯洛格公司预计明年除新糕点外的业务将获得 4.6 亿美元的税前收入。如果凯
洛格公司对其税前收入缴纳 40% 的税率，假设没有推出新糕点产品，公司明
年应缴纳多少税？如果推出新糕点，公司将缴纳多少税？
解答
• 如果不推出新糕点，凯洛格公司明年应缴纳的公司税为 4.6 亿美元 × 40% =
1.84 亿美元。
• 如果推出新糕点，凯洛格公司明年的税前收入将变为 4.6 亿美元 - 1500 万美
元 = 4.45 亿美元，因此应缴税为 4.45 亿美元 × 40% = 1.78 亿美元。
• 因此，推出新产品将使凯洛格公司明年少缴纳的税款为 1.84 亿美元 - 1.78 亿
美元 = 600 万美元。
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Indirect Effects on Incremental Earnings
• Opportunity Cost
• The value a resource could have provided in its best alternative
use
• In the HomeNet project example, space will be required for the
investment.
• Even though the equipment will be housed in an existing lab, the
opportunity cost of not using the space in an alternative way (e.g.,
renting it out) must be considered.

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Textbook Example 8.2

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Indirect Effects on Incremental Earnings
(cont'd)
• Project Externalities
• Indirect effects of the project that may affect the profits of other
business activities of the firm.
• Cannibalization (侵蚀) is when sales of a new product displaces
sales of an existing product.
• In the HomeNet project example, 25% of sales come from
customers who would have purchased an existing Linksys wireless
router if HomeNet were not available.
• Expected loss in sales of existing router:
• 25%100,000units$100/unit = $2.5 million
• Expected reduce in costs of existing router:
• 25%100,000units($60 cost/unit)= $1.5 million

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Table 8.2 Spreadsheet HomeNet’s Incremental Earnings Forecast
Including Cannibalization and Lost Rent
23.5=26-2.5

9.5=11-1.5

3000=2800+200

Table 8.1

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Sunk Costs and Incremental Earnings
• Sunk costs
• Sunk costs are costs that have been or will be paid regardless of the
decision whether or not the investment is undertaken.
• Sunk costs should not be included in the incremental earnings analysis.
• Fixed Overhead Expenses (间接费用)
• Typically overhead costs are fixed and not incremental to the project
and should not be included in the calculation of incremental earnings.
• Past R&D Expenditures
• Money that has already been spent on R&D is a sunk cost and
therefore irrelevant.
• The decision to continue or abandon a project should be based only
on the incremental costs and benefits of the product going forward.

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Sunk Costs and Incremental Earnings
(cont'd)
• Unavoidable Competitive Effects
• When developing a new product, firms may be concerned about
the cannibalization of existing products.
• However, if sales are likely to decline in any case as a result of
new products introduced by competitors, then these lost sales
should be considered a sunk cost.

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Real-World Complexities
• Typically,
• Sales will change from year to year.
• The average selling price will vary over time.
• The average cost per unit will change over time.

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Textbook Example 8.3

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Textbook Example 8.3 (cont'd)

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8.2 Determining Free Cash Flow and NPV
• The incremental effect of a project on a firm’s available
cash is its free cash flow (FCF).

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Calculating the FCF from Earnings 1

• Capital Expenditures and Depreciation

• Capital Expenditures are the actual cash outflows when an
asset is purchased. These cash outflows are included in
calculating free cash flow.
• Depreciation is a non-cash expense. The free cash flow estimate
is adjusted for this non-cash expense.

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 Calculating the FCF from Earnings 2

• Capital Expenditures and Depreciation

Table 8.3 Spreadsheet Calculation of HomeNet’s Free Cash Flow
(Including Cannibalization and Lost Rent)

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Calculating the FCF from Earnings 3

• Net Working Capital (NWC)

Net Working Capital  Current Assets  Current Liabilities
 Cash  Inventory  Receivables  Payables
• Most projects will require an investment in net working capital.
• Trade credit is the difference between receivables and payables.
• The increase in net working capital is defined as:

NWCt  NWCt  NWCt 1

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Calculating the FCF from Earnings (cont'd)

Table 8.4 HomeNet’s Net Working Capital Requirements

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Textbook Example 8.4

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Calculating FCF Directly
• Free Cash Flow
 
Unlevered Net Income

Free Cash Flow  (Revenues  Costs  Depreciation)  (1   c )

 Depreciation  CapEx   NWC

• The term c × Depreciation is called the depreciation tax shield.

FCF  (Revenues  Costs)  (1   c )  CapEx   NWC   c  Depreciation

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Calculating the NPV
FCFt 1
PV ( FCFt )  t
 FCFt 
(1  r ) (1  r )t

t  year discount factor

• HomeNet NPV (WACC = 12%)

NPV  16,500  4554  5740  5125  4576  1532
 5027
Table 8.5 Spreadsheet Computing HomeNet’s NPV

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8.3 Choosing Among Alternatives
• Evaluating Manufacturing Alternatives
• In the HomeNet example, assume the company
could produce each unit in-house for $95 if it spends $5 million
upfront to change the assembly facility (versus $110 per unit if
outsourced).
• The in-house manufacturing method would also require an
additional investment in inventory equal to one month’s worth of
production.

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8.3 Choosing Among Alternatives (cont'd)
• Evaluating Manufacturing Alternatives
• Outsource
• Cost per unit = $110
• Assume: Investment in A/P(应付账款) = 15% of COGS （销售成
本）
• COGS = 100,000 units × $110 = $11 million
• Investment in A/P = 15% × $11 million = $1.65 million
• ΔNWC = –$1.65 million in Year 1 and will increase by $1.65
million in Year 5
• NWC falls since this A/P is financed by suppliers

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8.3 Choosing Among Alternatives (cont'd)
• Evaluating Manufacturing Alternatives
• In-House
• Cost per unit = $95
• Up-front cost of $5,000,000
• Investment in A/P = 15% of COGS
• COGS = 100,000 units × $95 = $9.5 million
• Investment in A/P = 15% × $9.5 million = $1.425 million
• Investment in Inventory = $9.5 million / 12 = $0.792 million
• ΔNWC in Year 1 = $0.792 million – $1.425 million = –$0.633 million
• NWC will fall by $0.633 million in Year 1 and increase by $0.633
million in Year 5

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 8.3 Choosing Among Alternatives (cont'd)
Table 8.6 NPV Cost of Outsourced v.s. In-House Assembly of HomeNet

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8.4 Further Adjustments to Free Cash Flow
• Other Non-cash Items
• Amortization (摊销)
• 计算 FCF 时，应在无杠杆收益的基础上加回无形资产（如专利权）
的摊销费用。因为，这些项目并不是真正的现金支出。
• Timing of Cash Flows
• Cash flows are often spread throughout the year.
• 可以用月度、季度数据做更为准确的预测。
• Accelerated Depreciation
• Modified Accelerated Cost Recovery System
(加速成本回收系统，MACRS) depreciation

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折旧与摊销的计算方法与区别
• 折旧是针对固定资产而言的
• 摊销是针对无形资产和费用而言的。
• 一、折旧与计算方法
• 折旧一般是指固定资产折旧。
• 固定资产的折旧是指固定资产在使用过程中，逐渐损耗而消失的那部分价值。
• 固定资产损耗的这部分价值，应当在固定资产的有效使用年限内进行分摊，
形成折旧费用，计入各期成本。

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（二）折旧方法
① 平均年限法又称直线法：是将固定资产的折旧均衡的分摊到各期的
一种方法。

② 工作量法：是根据实际工作量计提折旧额的一种方法。

③ 双倍余额递减法：是在不考虑固定资产净残值的情况下，根据每期
期初固定资产帐面余额和双倍的直线法折旧率计算固定资产折旧的
一种方法。

④ 年数总和法又称合计年限法：是将固定资产的原值减去净残值后的
净额乘以一个逐年递减的分数计算每年的折旧额，这个分数的分子
代表固定资产尚可使用的年数，分母代表使用年限的逐年数字总和。

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• 二、摊销与计算方法
• 摊销的定义：就是本月发生,应由本月和以后各月产品成本共同负担的费用。
• 摊销的期限：最长为一年.如果超过一年,应作为长期待的摊费用核算。
• 摊销的种类：低值易耗品的摊销、无形资产的摊销、待摊费用的摊销、长期
待摊费用的摊销。
• 摊销的方法：一次摊销法、分期摊销法、五五摊销法等。

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Textbook Example 8.5

47
Textbook Example 8.5 (cont'd)

48
Further Adjustments to FCF (cont'd)
• Liquidation or Salvage Value (清算价值或残值)

Capital Gain  Sale Price  Book Value

Book Value  Purchase Price  Accumulated Depreciation

After-Tax Cash Flow from Asset Sale  Sale Price  (c  Capital Gain)

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Textbook Example 8.6

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Textbook Example 8.6 (cont'd)

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Further Adjustments to FCF (cont'd)
• Terminal or Continuation Value (终值或持续价值)
• Sometimes the firm forecasts FCF over a shorter horizon than the
full horizon of the project or investment.
• This amount represents the market value of the free cash flow
from the project at all future dates.

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Textbook Example 8.7

53
Textbook Example 8.7 (cont'd)

54
Further Adjustments to FCF (cont'd)

• Tax Carryforwards (纳税递延)

• Tax loss carryforwards (递延,20yrs) and carrybacks (追溯，2yrs)
allow corporations to take losses during its current year and offset
them against gains in nearby years.

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Textbook Example 8.8

56
Textbook Example 8.8 (cont'd)

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8.5 Analyzing the Project
• Break-Even Analysis
• The break-even level of an input is the level that causes the NPV
of the investment to equal zero.
• HomeNet IRR Calculation

Table 8.7 Spreadsheet HomeNet IRR Calculation

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8.5 Analyzing the Project (cont'd)
• Break-Even Analysis
• Break-Even Levels for HomeNet

Table 8.8 Break-Even Levels for HomeNet

$10000
$260
$110

• EBIT Break-Even of Sales

• Level of sales where EBIT equals zero

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Sensitivity Analysis
• Sensitivity Analysis shows how the NPV varies with a change in one
of the assumptions, holding the other assumptions constant.

Table 8.9 Best- and Worst-Case Parameter Assumptions

for HomeNet

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Figure 8.1 HomeNet’s NPV Under
Best- and Worst-Case Parameter Assumptions

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Textbook Example 8.9

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Scenario Analysis (情景分析)
• Scenario Analysis considers the effect on the NPV of
simultaneously changing multiple assumptions.
Table 8.10 Scenario Analysis of Alternative Pricing Strategies

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8.2 Price and Volume Combinations for HomeNet with
Equivalent NPV

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Chapter Quiz
1. Should you include sunk costs in the cash flow forecasts of a
project? Why or why not?
2. Should you include opportunity costs in the cash flow forecasts of
a project? Why or why not?
3. What adjustments must be made to a project’s unlevered net
income to determine its free cash flows?
5. How do you choose between mutually exclusive capital budgeting
decisions?
6. Why is it advantageous for a firm to use the most accelerated
depreciation schedule possible for tax purposes?
7. What is the terminal value of a project?
8. How does scenario analysis differ from sensitivity analysis?

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