Capital Budgeting: Estimating Cash: Incremental Project Cash Flows

Given a project's expected cash flows, it is easy to calculate its NPV, IRR, MIRR, payback, and discounted payback. Cash flows are estimated based on information from various sources. There is uncertainty in a project's forecasted cash flows, and some projects are more uncertain and thus riskier than others.

Q1. The most critical step in capital budgeting analysis is

-Select- 1. net income 2.cash flow 3. accounting income estimation.

Q2. The key is to focus on only

-Select- 1. relevant net income 2. incremental accounting income 3. incremental cash flows .

Q3. Factors that complicate the analysis are sunk costs, opportunity costs, externalities, changes in net operating working capital, and salvage values. Adjustments to the analysis must be made for

-Select- 1. inflation 2. interest 3. dividends .

We concentrate on expansion project analyses here but there are similarities when analyzing replacement projects.

Give the correct response to each of the following questions.

Q4. Which of the following items should be included in the capital budgeting analysis? -Select- a. Sunk costs b. Interest payments c. Dividend payments d. Opportunity costs

Q5. An outlay that was incurred in the past and cannot be recovered in the future regardless of whether the project under consideration is accepted is known as -Select- a. Opportunity cost b. Externality c. Sunk cost d. Cannibalization .

Q6. Which of the following is an example of an opportunity cost? a. A publisher introduces a new textbook which reduces sales of one of their existing textbooks. b. A firm has land that can be used in building a new store. If the new store is not built, the firm could sell the land for $2 million (net of taxes). c. Apple's investment in the iTunes music store boosted sales of its iPod. d. The cost of a report done 2 years ago to investigate the potential of a new plant and the permits required to build it. e. Statements a and d are both examples of opportunity costs.

The correct response is

-Select- 1. statement a 2. statement b 3. statement c 4. statement d 5. statement e .

Q7. Which of the following is an example of cannibalization? a. A publisher introduces a new textbook which reduces sales of one of their existing textbooks. b. A firm has land that can be used in building a new store. If the new store is not built, the firm could sell the land for $2 million (net of taxes). c. Apple's investment in the iTunes music store boosted sales of its iPod. d. The cost of a report done 2 years ago to investigate the potential of a new plant and the permits required to build it. e. Statements c and d are both examples of cannibalization.

The correct response is

-Select- 1. statement a 2. statement b 3. statement c 4. statement d 5. statement e .