ch 9 FINA

Considered relevant cash flows:

1. cash flows from external costs 2. cash flows from beneficial spillover effects 3. cash flows from erosion effects

Components of project cash flow:

1. operating cash flow 2. capital spending 3. change in net working capital

increase

Synergy will _____ the sales of existing products.

Net Present Value

The technique that will provide the most consistently correct result.

relevant cash flow for a project:

a relevant cash flow for a project is a change in the firm's overall future cash flow that comes about as a direct consequence of the decision to take that project

stand-alone

according to the ____ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm".

relevant

opportunity costs are classified as ____ costs in project analysis

note:

remember that the incremental cash flows for a project include all the changes in the FIRM'S future cash flows.

incremental cash flows

the difference between a firm's future cash flows With a project and those without the project ........ the incremental cash flows for project evaluation consist of ANY and ALL changes in the firm's future cash flows that are a direct consequence of taking the project. ** any cash flow that exists regardless of whether or not a project is undertaken is NOT relevant.

opportunity cost

requires us to give up a benefit. A common situation arises when a firm already owns some of the assets a proposed project will be using.

erosion

the cash flows of a new project that come at the expense of a firm's existing projects. In accounting for erosion, it is important to recognize that any sales lost as a result of our launching a new product might be lost anyway because of future competition. Erosion is only relevant when the sales would not otherwise be lost.

incremental cash flows

the difference between a firm's cash flows with a project versus without a project is called ______

relevant

the first step in estimating cash flow is to determine the ____ cash flows

operating cash flow is a function of:

1. depreciation 2. taxes 3. earnings before interest and taxes (EBIT)

Side effects from investing in a project refer to cash flows from:

1. erosion effects 2. beneficial spillover effects

Fixed costs include:

1. rent on a production facility 2. cost of equipment NOT: net working capital or inventory costs

Needed for cash flow estimation:

1. unit sales per period 2. variable cost per unit 3. selling price per unit

if a new project requires an investment in Net Working Capital when it is launched, then at the end of the project, NWC will be:

100% reversed

after-tax

Cash flows should always be considered on an _____ basis.

stand-alone principle

Once we identify the effect of undertaking the proposed project on the firm's cash flows, we need only focus on the project's resulting incremental cash flows. This is called the stand-alone principle What the stand-alone principle says is that, once we have determined the incremental cash flows from undertaking a project, we can view that project as a kind of "minifirm" with its own future revenues and costs, its own assets, and, of course, its own cash flows. We will then be primarily interested in comparing the cash flows from this minifirm to the cost of acquiring it.