Chapter 10

Question 1

What are Incremental Cash Flows?

Answer 1

All changes in future cash flows that are a direct result of undertaking the project

Question 2

What is the stand-alone principal?

Answer 2

Allows us to analyze each project in isolation of other firm’s projects, by focusing on incremental cash flows

Question 3

What are Sunk Costs?

Answer 3

Costs that have already been incurred and cannot be recovered

Question 4

What are Opportunity Costs?

Answer 4

Cost of lost options - we “give up” a benefit

Question 5

What are Pro Forma Financial Statements?

Answer 5

Projects future years’ operations (from which we can determine CFFA)

Question 6

What are the OCF other methods?

Answer 6

Regular Approach, Bottom-up approach, Top-down approach and the Tax shield approach

Question 7

What is the Regular approach?

Answer 7

OCF = EBIT + depreciation - taxes

Question 8

What is the Bottom-up Approach?

Answer 8

OCF = NI + Depreciation (add interest expense if applicable)

Question 9

What is the Top-Down Approach?

Answer 9

OCF = Sales - Costs - Taxes

Question 10

What is the Tax Shield Approach?

Answer 10

OCF = (sales - Costs) (1 - Tc) + (Depreciation * Tc)

note that depreciation is the tax depreciation (CCA) and Tc = the marginal tax rate

Question 11

What is depreciation?

Answer 11

A non-cash expense calculated for accounting purposes

Question 12

What is the straight-line depreciation?

Answer 12

Spreading the cost of an asset evenly over the time it will be used