Capital budgeting analysis nat 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 questibns: Which of the following is a reason cash flows may differ from accounting income? The total number of units sold will be different for accounting income and cash flows. Depreciation is a tax-deductuble expense but is not a cash outlay. 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 accopted. They are the difference between the cash flows the firm wili have if it accepts the project versus the cash flows it will have if it rejects the project. Understanding the nature of projects Capital bucgeting analysis often inyolves decisions related te expansion projects and/or reptacement projects. Based on your understanding of. expaniion and replacement projects, complete the folowing: A rental car company bought a new feet of midsize cars and soid oif its ald midsize cars becausat tiey had too mamy miles on them, Which type of profect would this ti considered? A replacement project An expansion project. What are sunk costs? What are sunk costs? Aexander 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 Aexander Industries 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, indude 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 extemalities A large sott-driak company currenty produces reguiar cola and diet cola. It is considering introducing a new soft drink that tastes like reguiar cola but. has zero calories like the diet cola, The new zero-calorie drink that tastes like regular cola is most lkely to produce