CCT321H5 Lecture Notes - Lecture 8: Operating Cash Flow, Sunk Costs, Cash Flow
11 May 2020
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Incremental earnings: the amount by which the firm"s earnings are expected to change as a result of the investment decision, example: a project costs ,000 today and has an opportunity cost of capital of 10%. It will produce cash revenues of ,500 and in years 1 and 2 respectively. The asset can be depreciated at ,000 per year: compare the npv using cash flows, to the npv using accounting income. Incremental cash flow = cash flow with project cash flow without project: the following are incremental cash flows are discounted: Do not include the cash flow in the analysis. Include opportunity costs: suppose your firm is considering building a factory on some land, your firm purchased this land for ,000, however, there is an opportunity cost. If your firm builds the factory, there is no out-of-pocket cost for the land: that is the value of the foregone alternative use of the land.
