Corporate Finance MBA Spring 2021 - Session 13: Earnings to Cash flows to Incremental Cash Flows

In this class, we started the move from earnings to cash flows, by making three standard adjustments: add back depreciation & amortization (which leaves the tax benefit of the depreciation in the cash flows), subtract out cap ex and subtract out changes in working capital. Finally, we introduced the key test for incremental cash flows by asking two questions: (1) What will happen if you take the project and (2) What will happen if you do not? If the answer is the same to both questions, the item is not incremental. That is why "sunk" costs, i.e., money already spent, should not affect investment decision making. It is also the reason that we add back the portion of allocated G&A that is fixed and thus has nothing to do with this project. Finally, we looked at two time-weighted, incremental cash flow approaches to calculating returns, NPV and IRR, and used them to analyze the Rio Disney theme part. Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr21/session13slides.pdf Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session13test.pdf Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session13soln.pdf