boken kap 7 del 1

Question 1

What does this mean?
NPV
EBIT
OCF
T_c
C_i
PV?

Answer 1

NPV =Net Present value
EBIT = Earnings before interest and taxes
OCF = operating cash flows
t_c = Corporate tax rate
C_i = cash flow at time i
PV = Present value

Question 2

Q: What should always be discounted when calculating NPV?

Answer 2

A: Cash flows, not earnings.

Question 3

Q: What are incremental cash flows?

Answer 3

A: The changes in a firm’s cash flow that occur as a direct consequence of accepting a project.

Question 4

Q: Are sunk costs included in incremental cash flows? Why or why not?

Answer 4

A: No, sunk costs are not included because they have already occured, and are not affected by the project.

Question 5

Q: What is an opportunity cost in the context of incremental cash flows?

Answer 5

A: Lost revenues because of the investment.

Question 6

Q: What is erosion in capital budgeting?

Answer 6

A: When a new product reduces sales of an existing product, causing a cost.

Question 7

Q: What is synergy in capital budgeting?

Answer 7

A: When a new project increases cash flows from existing projects.

Question 8

Q: When should allocated costs be considered cash outflows in a project?

Answer 8

A: Only if they are incremental to the project.