Relevant Cash Flows (OT) Flashcards
General rule for including cash flows?
Future and incremental cash flows included
Depreciation included?
No as it’s not a cash flow
What is incremental cash flows?
The extra cash flows to the company from a machine
What are future cash flows?
The extra returns from market research
Market research?
Money already committed. It is not included
Historical cost?
Balance sheet values. Not relevant
Book values?
Not relevant
Interest?
We ignore it as we are already discounting it
Opportunity costs?
Losing money I’m currently getting. A positive cash flow
Research costs aleardy committed?
Not relevant to cash flows
What is a saving?
A negative cost. A negative cash flow
What is the prime cost?
labour + materials
When are overheads only relevant?
If total overheads for the comapny change
Corporation tax payable?
One year in arrears (or one year late)
Why is profit lower (tax)?
Tax allowable depreciaiton. It is deducted from cash flow to get taxable profit
One in arrears?
Included one column to the right in the working
If there is inflation?
The revenue will increase
When dealing with inflation?
Discounted actual casj flows at actual cost of capital?
Another word for actual?
Nominal
How is cost of capital given?
Always actual cost
Higher inflation?
Usually high interest rates
Alternative approach to inflation
Discount cash flows ignoring inflation at cost of capital if no inflation
Cash flows and cost of capital ignoring inflation name?
Real cash flows
Real cost of capital
If question tells you to discount at real rate?
Do real rate, don’t argue
10000 per annum at current prices on perpetuity. Inflation at 4$ per annum and nominal cost of capital 12%?
Have to use the real rate, not the nominal rate
When to calculate actual cost of capital?
If question says:
Real cost of capital 10%
General inflation rate 3%
