FINA 2710 Chapter Notes - Chapter 9: Cash Flow, Income Statement, Sunk Costs
8 Jan 2017
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Chapter 9: using discounted cash flow analysis to make investment decisions. Identifying cash flows those that will only occur if the project is accepted. The cash flows that should be included in a capital budgeting analysis are. Incremental cash flow = cash flow with project cash flow without project. When calculating npv, recognize investment expenditures when they occur. You cannot mix and match real and nominal quantities. The stand-alone principle allows us to analyze each project in isolation from the firm by focusing on incremental cash flows. Depreciation is not a cash flow, but does affect taxes which are cash flows. Purchases of fixed assets represents cash outflows: they also produce depreciation. Working capital changes associated with a capital budgeting project must be recognized at the beginning and end of the project: net working capital = current assets current liabilities. Ignore sunk costs: a cost that will occur regardless of the project going through or not.
