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? O 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. Incremental cash flows are not relevant because they will occur whether or not the project is accepted 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: If a clothing store opens a second retail location on the other side of town, this project would be considered 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? 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 regular cola is most likely to produce externality