1. Concepts used in cash flow estimation 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, answer the following questions: The present value of can be used to determine the basis of a firm's value. Which of the following best describes incremental cash flows? 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 rtated to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, answer 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? Alexander Industries 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 Alexander thdustries 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 paper manufacturer has bulit a plant that meets all government-mandated environmental regulations, but the plant stili produces an unpleasant odor when it is being operated. Many residents in the area dislike the paper mill because of these unpleasant odors, This is an example of externality