1. Concepts used in cash flow estimation Aa Aa Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following questions: Which of the following is a reason cash flows may differ from accounting income? Depreciation is a tax-deductible expense but is not a cash outlay. O The total number of units sold will be different for accounting income and cash flows. Which of the following best describes incremental cash flows? O Incremental cash flows are not relevant because they will occur whether or not the project is accepted. They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project. Understanding the nature of projects Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, complete the following: A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? O An expansion project A replacement project What are sunk costs? Acme Manufacturing owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Acme Manufacturing include the value of the warehouse as part of the initial investment in the new project or treat the value of the warehouse as a sunk cost?
1. Concepts used in cash flow estimation Aa Aa Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following questions: Which of the following is a reason cash flows may differ from accounting income? Depreciation is a tax-deductible expense but is not a cash outlay. O The total number of units sold will be different for accounting income and cash flows. Which of the following best describes incremental cash flows? O Incremental cash flows are not relevant because they will occur whether or not the project is accepted. They are the difference between the cash flows the firm will have if it accepts the project versus the cash flows it will have if it rejects the project. Understanding the nature of projects Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, complete the following: A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? O An expansion project A replacement project What are sunk costs? Acme Manufacturing owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Acme Manufacturing include the value of the warehouse as part of the initial investment in the new project or treat the value of the warehouse as a sunk cost?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:1. Concepts used in cash flow estimation
Aa Aa
Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the
origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following
questions:
Which of the following is a reason cash flows may differ from accounting income?
Depreciation is a tax-deductible expense but is not a cash outlay.
The total number of units sold will be different for accounting income and cash flows.
Which of the following best describes incremental cash flows?
Incremental cash flows are not relevant because they will occur whether or not the project is accepted.
They are the difference between the cash flows the firm will have if it accepts the project versus the cash
flows it will have if it rejects the project.
Understanding the nature of projects
Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based
on your understanding of expansion and replacement projects, complete the following:
A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many
miles on them. Which type of project would this be considered?
An expansion project
A replacement project
What are sunk costs?
Acme Manufacturing owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use
the warehouse in a new project. Should Acme Manufacturing include the value of the warehouse as part of the initial
investment in the new project or treat the value of the warehouse as a sunk cost?
Transcribed Image Text:A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many
miles on them. Which type of project would this be considered?
An expansion project
A replacement project
What are sunk costs?
Acme Manufacturing owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use
he warehouse in a new project. Should Acme Manufacturing include the value of the warehouse as part of the initial
nvestment in the new project or treat the value of the warehouse as a sunk cost?
Yes, include the value of the warehouse as part of the initial investment in the new project
No, treat the value of the warehouse as a sunk cost
The role of externalities
A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft
drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like
egular cola is most likely to produce
externality.
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