Financial Management (Chapter 12
Firm cash flows without the project plus or minus changes in net gain. Firm cash moves with the task plus firm cash flows without the project. Firm cash flows with the project minus company cash flows without the project. Firm cash flows without the task plus or minus changes in income with the task.
It is treated as a cash outflow when estimating the incremental cash flows associated with a project. It is built into the discount rate. It is considered a synergistic incremental cashflow. Interest expenditure is not relevant to any capital budgeting decisions. Deducting interest expense from income and including it in the discount rate would lead to double-keeping track of.
Cash flows reveal the timing of benefits and costs more accurately than accounting revenue. Cash flows are more steady than accounting profits. The new project will take up about 5% of the Chief Operating Officer’s time, so 5% of her salary should be included. All of the above should be included.
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The owner of a convenience store is considering adding a take-out sandwich section to her offerings. The new activity will occupy 25% of the space and take into account 30% of total income. 9,000 per yr and will not change because of the new activity. How much of the insurance premium should be allocated to the new product line? Mr. Smith included the expense of test marketing before production in the calculation of the initial outlay.
Sunk costs are a kind of incremental cash flow that should be contained in all capital-budgeting decisions. When identifying how much overhead cost relating to incremental cash moves for a capital budgeting decision, the allocation of overhead by the accounting department predicated on the percentage of space used by a project should be utilized.
The pertinent concern for identifying whether overhead costs should be part of a project’s relevant after-tax cash flow is if the project benefits from the overhead items. The original outlay entails the immediate cash outflow necessary to buy the asset and put it in working order. When changing an existing asset, the money inflow associated with the sale of the old asset and any related taxes effects must be considered and accounted for in the evaluation. The initial outlay of an asset does not include installation costs. In making a capital budgeting decision we only are the incremental cash moves resulting from the investment decision.