Getting Started Pro Forma Financial Statements

Pro forma financial statements are a convenient and easily understood means of summarizing much of the relevant information for a project. To prepare these statements, we will need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs. We will also need to know the total investment required, including any investment in net working capital.

To illustrate, suppose we think we can sell 50,000 cans of shark attractant per year at a price of $4 per can. It costs us about $2.50 per can to make the attractant, and a new product such as this one typically has only a three-year life (perhaps because the customer base dwindles rapidly). We require a 20 percent return on new products.

pro forma financial statements

Financial statements projecting future years' operations.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

IV. Capital Budgeting

10. Making Capital Investment Decisions

© The McGraw-Hill Companies, 2002

PART FOUR Capital Budgeting

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