Chapter 9 quiz Capital budgeting and cash flow
3 reasons investment projects are generated
1). growth opportunities 2). cost reduction opportunities 3). meet legal requirements and health and safety standards
4 parts of net investment
1). the installed costs of the assets 2). plus any initial net working capital requirements 3). less any cash inflows from the sale of replacement assets 4). plus or minus the tax consequences associated with the sale of existing assets and/or the purchase of new assets
annual depreciation amount
= installed cost / number of years over which the asset is depreciated
4 key steps in capital budgeting process
1). generating investment project proposals 2). estimating cash flows 3). evaluating alternatives and selecting projects to be implemented 4). reviewing a project's performance after it has been implemented and post-auditing its performance after termination
NCF
= change in OEAT + change in dep. - change in NWC
net (operating) cash flows
NCF
net cash flow definition
In the last year of a project's life, what may have to be modified to reflect the recapture of the accumulated net working capital investment and any after-tax salvage value received
net investment
NINV
independent, mutually exclusive, contingent
What 3 ways can projects be classified?
net operating cash flow
equal to the change in net operating earnings after tax plus the change in depreciation minus the change in net working capital investment requirements associated with the adoption of a project
cost of capital
defined as the cost of funds supplied to a firm; represents the required rate of return a firm must earn on its investments and thus is an important input in the capital budgeting process
net investment
includes the project cost plus any necessary increases in initial net working capital minus any proceeds from the sale of the old asset(s) (in the case of replacement decisions) plus or minus the taxes associated with the sale of the old asset(s) and/or the purchase of the new asset(s)
3 ways projects are classified
independent, mutually exclusive, contingent
asset replacement project
involves retiring one asset and replacing it with a more efficient one
incremental after-tax basis; indirect effects
project cash flows should be measured on a what and should include all of the what the project will have on the firm?
sunk costs
represent outlays that have already been made or committed and that cannot be recovered
asset expansion project
requires a firm to invest funds in additional assets to increase sales or reduce costs
opportunity cost
resources of a firm used in an investment project should be valued at their what based upon the cash flows these resources could generate in their next-best alternative use
contingent project
the acceptance of this depends on the adoption of one or more other projects
independent project
the acceptance of this does not directly eliminate other projects from consideration
mutually exclusive project
the acceptance of this precludes other alternatives
Modified Accelerated Cost Recovery System (MACRS)
the economic viability of a project can be affected by special tax considerations, such as the use of accelerated depreciation methods like what?
net investment
the initial outlay required to implement a project
capital budgeting
the process of planning for purchases of assets whose cash flows are expected to continue beyond one year
net (operating) cash flows
these are the incremental changes in a firm's operating cash flows that result from investing in the project
net (operating) cash flows
these include changes in the firm's revenues, operating costs, depreciation, taxes, and net working capital with and without the project
sunk costs
what type of costs should not be considered when evaluating an investment project?
