Capital budgeting analysis requires not only the evaluation of cash flows but also the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete the following questions.

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$-$deductible expense but is not a cash outlay.

Ideally, capital budgeting analysis should take cash flows into account $.$

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 question.

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?

A successful sushi chain in Hong Kong spent $$500,000$ to conduct a study on whether to open a location in the United States. The study showed that the best place for the company to open their first location would be in Chicago. When conducting its capital budgeting analysis, how should the company account for the cost of the study when estimating the amount of the initial investment that the new store will require?

The company should ignore it$.$

The company should include it in the amount of the initial investment.

The role of externalities

A cell phone company recently gave customers the ability to buy applications that they can download to their cell phones. Allowing customers to use these applications increased cell phone sales. This is an example of externality.

Autologic Inc. and Magenta Inc. are both auto parts manufacturers. Their revenues and expenses are identical except that Magenta claims a depreciation expense on its depreciable assets. Assuming all sales and expenses are for cash, which company will have the higher earnings before tax but the lower after$-$tax cash flow?

Magenta Inc.

Autologic Inc.Concepts used in cash flow estimation

Capital budgeting analysis requires not only the evaluation of cash flows but also the understanding of the origin of those cash flows. Based on your

understanding of cash flows in a firm, complete the following questions.

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$-$deductible expense but is not a cash outlay.

Ideally, capital budgeting analysis should take cash flows into account

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 question.

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?

A successful sushi chain in Hong Kong spent $$500,000$ to conduct a study on whether to open a location in the United States. The study showed that

the best place for the company to open their first location would be in Chicago. When conducting its capital budgeting analysis, how should the

company account for the cost of the study when estimating the amount of the initial investment that the new store will require?

The company should ignore it$.$

The company should include it in the amount of the initial investment.

The role of externalities

A cell phone company recently gave customers the ability to buy applications that they can download to their cell phones. Allowing customers to use

these applications increased cell phone sales. This is an example of

externality.

Autologic Inc. and Magenta Inc. are both auto parts manufacturers. Their revenues and expenses are identical except that Magenta claims a

depreciation expense on its depreciable assets. Assuming all sales and expenses are for cash, which company will have the higher earnings before tax

but the lower after$-$tax cash flow?

Magenta Inc.

Autologic Inc.