When estimating the project's operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since. Fn1 testbank chapter 14 mc flashcards opportunity cost b) sunk cost c) externality d) intangible i replacement projects are projects that involve the replacement of an existing. • define the following terms: relevant cash flow, incremental cash flow, sunk cost, opportunity cost, externalities, and cannibalization • analyze an expansion project and make a. Incremental cash flow sunk cost opportunity cost externality cannibalization expansion project replacement project cash flows and their relevance cash flows refer to both the inflows and.
Incremental cash flow and capital budgeting when determining incremental cash flows from a new project, sunk costs, opportunity cannibalization cannibalization is the type of. Bincremental cash flows are those cash flows that arise solely from the asset that is being evaluated the market value of the building is an opportunity cost of the project an. 20 finance true/ false questions answer the following questions below as true or false 1 the capital intensity has a major effect on capital requirements as the capital intensity increases. Current: business finance tutorial 1 business finance tutorial 1 business finance incremental cash flow sunk cost opportunity cost externality cannibalization expansion project.
(1) decision based on cf, not accounting income -- incremental cash flows (2) cash flows are based on opportunity costs (3) the timing of cash flows is important early flows worth more than. When a new project reduces cash flows that the firm would otherwise have had a negative impact b incremental cash flow (5) 2 opportunity cost (4) 3 a cash outlay that has already. Past sunk costs might make the project unprofitable, but if the incremental cash flows are sufficiently larger than the incremental costs, ie, if the npv and irr are satisfactory, then the. Incremental cash flow is the gain received from a new project incremental cash flow = revenues - expenses - initial cost in this example, the incremental cash flows for each project.
Incremental cash flows a sunk cost is an outlay that has already occurred (or been committed) since the outlay has already occurred, it is not affected by the decision to accept or. Chapter 12 cash flow estimation and risk analysis learning objectives after reading this chapter, students should be able to: analyze an expansion project and make a decision whether the. Discussion 6-1 : shared practice: impacts of working capital (please save question with this title) cash flow estimation and risk analysis home depot keeps growing home depot (hd) has. These are the incremental cash flows, that is, the extra cash flow that will happen if the project is attempted contrasted with if the project is not undertaken while evaluating this cash. An externality is an effect that the investment project has on something else takes sales from an existing company project) an opportunity cost is what would be earned on the next-best use.
The opportunity cost of renting the plant is included in the analysis as a after tax cost (cash outflow) because it will not be earned as a result of utilizing the asset for the project the. Incremental cash flow, sunk cost, opportunity cost, externality, and cannibalization define an expansion project and a replacement project determine by npv analysis whether a replacement. Corporate finance chapter2 18 payback period • the payback period is the length of time it takes to recover the initial cash outlay of a project from future incremental cash flows.
Los 1da: define the following terms and discuss their relevance to capital budgeting: incremental cash flow, sunk cost, opportunity cost, externality, and cannibalization incremental cash. Decrease expenses by $200 per year thus, the annual incremental cash flow is a before-tax savings of $200 a sunk cost is one that has already occurred and is not cost of the project. Cash flows are based on opportunity costs opportunity costs are cash flows that a firm will lose by undertaking the project under analysis these are cash flows generated by an asset the.