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10.1 Project Cash Flows: A First Look 312

Relevant Cash Flows 312 The Stand-Alone Principle 312

10.2 Incremental Cash Flows 313 Sunk Costs 313 Opportunity Costs 313

Side Effects 314 Net Working Capital 314 Financing Costs 314 Other Issues 314

10.3 Pro Forma Financial Statements and Project Cash Flows 315

Getting Started: Pro Forma Financial

Statements 315 Project Cash Flows 317

Project Operating Cash Flow 317 Project Net Working Capital and Capital Spending 317 Projected Total Cash Flow and Value 318

10.4 More on Project Cash Flow 319

A Closer Look at Net Working Capital 319 Depreciation 322

Modified ACRS Depreciation (MACRS) 322 Book Value versus Market Value 323 An Example: The Majestic Mulch and Compost Company (MMCC) 325 Operating Cash Flows 325 Change in NWC 325 Capital Spending 325 Total Cash Flow and Value 328 Conclusion 328

10.5 Alternative Definitions of Operating Cash Flow 331

The Bottom-Up Approach 331 The Top-Down Approach 332 The Tax Shield Approach 332 Conclusion 333

11.1 Evaluating NPV Estimates 349

The Basic Problem 350 Projected versus Actual Cash Flows 350 Forecasting Risk 350 Sources of Value 351

11.2 Scenario and Other What-If Analyses 351 Getting Started 352

Scenario Analysis 353 Sensitivity Analysis 354 Simulation Analysis 355

11.3 Break-Even Analysis 356 Fixed and Variable Costs 356

Variable Costs 356 Fixed Costs 358 Total Costs 358 Accounting Break-Even 360 Accounting Break-Even: A Closer Look 360 Uses for the Accounting Break-Even 362

11.4 Operating Cash Flow, Sales Volume, and Break-Even 363

Accounting Break-Even and Cash Flow 363 The Base Case 363 Calculating the Break-Even Level 363 Payback and Break-Even 364 Sales Volume and Operating Cash Flow 364 Cash Flow, Accounting, and Financial Break-Even Points 365 Accounting Break-Even Revisited 365 Cash Break-Even 365 Financial Break-Even 366 Conclusion 366

11.5 Operating Leverage 368

The Basic Idea 368 Implications of Operating Leverage 368 Measuring Operating Leverage 368 Operating Leverage and Break-Even 370

11.6 Capital Rationing 371

Soft Rationing 371 Hard Rationing 371

11.7 Summary and Conclusions 372

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