Acoounting Policy

In: Business and Management

Submitted By longqi413
Words 2271
Pages 10
Part I
As per request to analyze which Network to be selected, this report is to provide the reasons why Network I is better. Before finalize the decision to select between Network I and Network II, there are three steps: 1. The forecasted net cash flow derived for both Network 2. Techniques use to evaluate Networks 3. Final decision to accept Network I

1. Forecasting cash flow for both Networks
As attached in Appendix I, to get free cash flow for these two projects, there are 3 stages: 2.1 Calculation of Cost of capital
“Capital asset pricing model (CAPM) gives a condition under which we can generalize about the structure of expected return of a share in market” (Benninga 2008, p. 319). We use this discount rate to calculate the net present value of the projects.
The formula is E (ri) = rf + E(rm – rf) i = 18.66%
Where E (ri): required return on the equity of stock i E(rm – rf): expected return on the market over and above the risk-free rate rf: risk-free rate

2.2 Profit calculation
Before calculating of cash flow forecasts, incremental profit before tax should be derived first. Incremental profit before tax is defined as revenue less operating expense and depreciation, but plus opportunity cost from not paying the fee to Commonwealth Bank if the Capital Bank switches to either Network I or II.

2.3 Cash flow calculation
The remaining cash flows include initial investment on ATM and installation cost, the changes in working capital, the final recovery of salvage value, taxation, and non-accounting cash flow - depreciation (Brealey et al. 2003 p. 137).

The changes that result in increase in working capital are cash outflows and which result in decrease in working capital are cash inflows. It is assumed that the bank will recover that investment in working capital at the end of the project (see Appendix I,…...

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