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.
