Topic 5- Cash flow projection

Question 1

What is capital budgeting?

Answer 1

The procedure of recognizing, analyzing & choosing investment projects whose cash flows are anticipated to extend last one year (to increase shareholders wealth)

Question 2

What is the importance of cash flows?

Answer 2

• A company can survive without projects for a short time but not without cash flows
• Cash flows measures the actual inflow & outflow of cash, while profit represents only periodic performance (accounting)
• A form can spend its operating cash flow but not its net income

Question 3

What are relevant cash flows?

Answer 3

Cash flows should be considered if they will occur only if the project is accepted (capital budgeting analysis)
- These cash flows are called Incremental Cash Flows

Question 4

What are sunk costs?

Answer 4

Expenses that will incur whether the project is accepted or rejected
- Not relevant

Question 5

What are opportunity costs?

Answer 5

The loss of certain costs (benefits) when an alternative project is chosen over another
- Relevant

Question 6

What is erosion?

Answer 6

Any loss that occurs due to a new project (loss of sales of existing projects)

Question 7

What are synergy gains?

Answer 7

When a new project is introduced, this can increase the impulse purchases or sales for other existing projects