Chapter 12 Analyzing Project Cash Flows

Question 1

This is calculated using a simple formula: the cash a project generates minus the expenses a project incurs. Exclude any fixed operating costs or other revenue or costs that are not specifically related to a project.

Answer 1

Project cash flow

Question 2

Project cash flows represent the :

Answer 2

cash that flows in and out of a particular project.

Question 3

Project cash flows are typically categorized into 3:

Answer 3

1. The cash flows associated with the launching of the investment
2. The operating period cash flows
3. The terminal cash flows

Question 4

This are commonly referred to collectively as the initial cash outlays

Answer 4

The cash flows associated with the launching of the investment

Question 5

This include the cash flows for all years up until the project’s termination

Answer 5

The operating period cash flows,

Question 6

This are a direct result of shutting down the project.

Answer 6

The terminal cash flows

Question 7

It is the additional cashflow when accepting or implementing a new project.

Answer 7

Incremental Cash Flows

Question 8

7 Guidelines in Incremental Cash Flows

Answer 8

1.Sunk Costs Are Not Incremental Cash Flows
2.Overhead Costs Are Generally Not Incremental Cash Flows
3.Look for Synergistic Effects
4.Beware of Cash Flows Diverted from Existing Products
5.Account for Opportunity Costs
6.Work in Working-Capital Requirements
7.Ignore Interest Payments and Other Financing Cost

Question 9

This are those costs that have already been incurred or are going to be incurred, regardless of whether or not the investment is undertaken.

Answer 9

Sunk costs

Question 10

This expense such as the cost of heat, light, and rent often occur whether we accept or reject a particular project.

Answer 10

Overhead expenses

Question 11

Overhead expenses are not a relevant consideration when :

Answer 11

evaluating project cash flows.

Question 12

Oftentimes the acceptance of a new project will have an effect on the cash flows of the firm’s other projects or investments.

Answer 12

Look for Synergistic Effects

Question 13

Synergistic effects can be either positive or negative, and if can be anticipated, their costs and benefits are :

Answer 13

relevant to the project analysis.

Question 14

This occurs when the offering of a new product draws sales away from an existing product.

Answer 14

Beware of Cash Flows Diverted from Existing Products

Question 15

An important type of negative synergistic effect comes in the form of :

Answer 15

revenue cannibalization.

Question 16

In calculating the cash flows of an investment, it is important to account for what economists refer to as opportunity cost.

Answer 16

Account for Opportunity Costs

Question 17

The cost of passing up the next best choice when making a decision.

Answer 17

Opportunity Cost

Question 18

The actual amount of new investment required by the project is determined by the sum of the increase in accounts receivables and inventories less the increase in accounts payable.

Answer 18

Work in Working-Capital Requirements