Aswath Damodaran 204
The incremental cash flows on the project
To get from cash flow to incremental cash flows, we
"Taken out of the sunk costs from the initial investment
"Added back the non-incremental allocated costs (in after-tax terms)
Now ( 0 ) 1 2 3 4 5 6 7 8 9 10
Operating Income after Taxes - $^165 - $^77 $^75 $^206 $^251 $^297 $^347 $^402 $^412
+ Depreciation & Amortization $^537 $^508 $^430 $^359 $^357 $^358 $^361 $^366 $^369
- Capital Expenditures $^2 ,^500 $^1 ,^000 $^1 ,^269 $^805 $^301 $^287 $^321 $^358 $^379 $^403 $^406
- Change in Working Capital $^0 $^0 $^63 $^25 $^38 $^31 $^16 $^17 $^19 $^21 $^5
- Non-incremental Allocated Expense ( 1 - t) $^0 $^78 $^110 $^157 $^196 $^216 $^237 $^261 $^287 $^293
- Sunk Costs 500
Cashflow to Firm - $^2 ,^000 - $^1 ,^000 - $^880 - $^289 $^324 $^443 $^486 $^517 $^571 $^631 $^663
$ 500 million has already been spent
2 / 3 rd of allocated G&A is fixed.
Add back this amount ( 1 - t)
A sunk cost is any cost that has already been incurred and will not be recovered
even if the project under consideration is rejected.
Only the after-tax amount of the non-incremental allocated costs are added back
because the cash flows are after-tax cash flows.
Alternatively, the cash flows can be estimated from scratch using only the
incremental cash flows.
