Fundamentals of Capital Budgeting - Determining Incremental Free Cash Flow

6 important questions on Fundamentals of Capital Budgeting - Determining Incremental Free Cash Flow

What do you do to take the influence of depreciation in account when computing free cash flows?

You subtract the depreciation from Incremental earnings, this way one receives the correct taxes. Then you add the depreciation back

Why can't cash held up in credit to customers and inventory be ignored when forecasting a projects cash flows?

Since this money can not be used for other investments

How does an increase in net working capital influence cash flows that year?

An increase results in a reduction of cash flows
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How do you work a change in net working capital into incremental free cash flows?

You subtract the change from incremental earnings

With what formula Free Cash Flows can be calculated directly?

Free Cash Flows = (Revenues - Costs - Depreciation) x (1-Tax Rate) + Depreciation - CapEx - Change in NWC

What is the depreciation tax shield?

The tax savings that result from deducted depreciation

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