Relevant Cash Flows (OT)

Question 1

General rule for including cash flows?

Answer 1

Future and incremental cash flows included

Question 2

Depreciation included?

Answer 2

No as it’s not a cash flow

Question 3

What is incremental cash flows?

Answer 3

The extra cash flows to the company from a machine

Question 4

What are future cash flows?

Answer 4

The extra returns from market research

Question 5

Market research?

Answer 5

Money already committed. It is not included

Question 6

Historical cost?

Answer 6

Balance sheet values. Not relevant

Question 7

Book values?

Answer 7

Not relevant

Question 8

Interest?

Answer 8

We ignore it as we are already discounting it

Question 9

Opportunity costs?

Answer 9

Losing money I’m currently getting. A positive cash flow

Question 10

Research costs aleardy committed?

Answer 10

Not relevant to cash flows

Question 11

What is a saving?

Answer 11

A negative cost. A negative cash flow

Question 12

What is the prime cost?

Answer 12

labour + materials

Question 13

When are overheads only relevant?

Answer 13

If total overheads for the comapny change

Question 14

Corporation tax payable?

Answer 14

One year in arrears (or one year late)

Question 15

Why is profit lower (tax)?

Answer 15

Tax allowable depreciaiton. It is deducted from cash flow to get taxable profit

Question 16

One in arrears?

Answer 16

Included one column to the right in the working

Question 17

If there is inflation?

Answer 17

The revenue will increase

Question 18

When dealing with inflation?

Answer 18

Discounted actual casj flows at actual cost of capital?

Question 19

Another word for actual?

Answer 19

Nominal

Question 20

How is cost of capital given?

Answer 20

Always actual cost

Question 21

Higher inflation?

Answer 21

Usually high interest rates

Question 22

Alternative approach to inflation

Answer 22

Discount cash flows ignoring inflation at cost of capital if no inflation

Question 23

Cash flows and cost of capital ignoring inflation name?

Answer 23

Real cash flows

Real cost of capital

Question 24

If question tells you to discount at real rate?

Answer 24

Do real rate, don’t argue

Question 25

10000 per annum at current prices on perpetuity. Inflation at 4$ per annum and nominal cost of capital 12%?

Answer 25

Have to use the real rate, not the nominal rate

Question 26

When to calculate actual cost of capital?

Answer 26

If question says:
Real cost of capital 10%
General inflation rate 3%