10

Question 1

Why is the effect of taking on a project

Answer 1

To change the firm’s overall CF today and future

Question 2

Relevant CF

Answer 2

a change in firm’s overall future CF that comes as a direct conseq. of decision to take the project.

Question 3

Incremental CF

Answer 3

To any and all changes in the firm’s future cash flows that are a direct consequence of taking the project. that will only occur (or
not occur) if the project is accepted(extra cash)

Question 4

Stand-alone Principle

Answer 4

allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows.

Question 5

Right Question? Will this cash flow
occur (or not occur) ONLY if we accept the project

Answer 5

-Yes, include as incremental
-No, don’t include bc it will occur anyways
-part of it, include the part that occurs/not occur in the project.

Question 6

Incremental CF

Answer 6

*Sunk costs - costs that have been incurred in the past
* Opportunity costs - costs of lost options
* Side effects
− Positive side effects - benefits to other projects
− Negative side effects (erosion) - costs to other projects
* Changes in net working capital
* Financing costs
* Capital Cost Allowance (CCA)

Question 7

Pro forma Fin. statement

Answer 7

summary of relevant info of the project.
Capital budgeting relies on Statement of comprehensive income

Question 8

Why is int. expense not included in proforma

Answer 8

interest paid is a financing exp. not a component of OCF

Question 9

Why consider changes in MWC separately

Answer 9

-GAAP req. sales should be recorded when made not when cash is received
-COGS recorded when sales are made regardless of paying the supplier
-to support sales buy inv. even w/o collecting cash

Question 10

Depreciation is what type of expense

Answer 10

non cash expense and included cause it relates to tax