Ch. 10 Making inv. decisions

Question 1

Incremental CF

Answer 1

CF that should be included in a capital budgeting analysis are ones that will only occur if the project is accepted.

Question 2

Stand alone principle?

Answer 2

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

Question 3

The right Question

Answer 3

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

Question 4

Incremental CF

Answer 4

-Sunk costs- cost that have been incurred in the past
-Opp. cost- costs of lost options
-Side effects: + benefits to other proj. - costs to other proj.
-Changes in NWC
-Financing costs
-Capital Cost Allowance(cca)

Question 5

Capital budgeting relies on

Answer 5

pro forma accounting statements, particularly statements of comprehensive income