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FN 601 Financial Management Lecture 7 - Investment Relevant Cash Flows Review and Assignment Questions Assignment Questions: 26.28, 29, 30, 31 Review Questions: All the rest 8 ID: 1 Why are capital budgeting decisions so important to the success of a firm? 2 Why is a sales forecast a key element in a capital budgeting decision 3. How does a fimm generate ideas for capital projects? 4. Explain how capital budgeting is related to the wealth-maximization goal that should be pursued by the financial manager of a tim? 5 What are the theoretical justifications for the NPV decision rule? 6. Distinguish between a money cash flow and real cash flow 7 Explain what is meant by conventional and unconventional cash Nows and what problems they might cause an investment appraisal When estimating a peaject's relevant cash flows why is it important for the financial analyst a focus on incremental cash flows binare financing costs? c. consider taxes? and d. adjust for non-cash expenses? 9 Why do we consider changes in net working capital associated with a project to be cash inflows or outflows rather than the absolute level of working capital? 10. Explain why empirical studies show that a practice firms most often prefer to evaluate projects using traditional methods 11 Those business school graduates don't know what they are talking about We have to allocate overheads to every department and activity, Il' we simply excluded this cost there would be a big lump of costs not written off All projects must bear some central overhead." Discuss this statement 12 For what kinds of investments would terminal value account for a substantial fraction of the total project NPV and for what kinds of investments would terminal value be relatively unimportant 13 What is meant by a potential investment's relevant cash flows? What are sunk costs and cannibalization, and do they affect the process of determining a proposed investment's incremental cash flows? A real estate development firm owns a fully leased 40-story office building. Atenant recently moved its offices out of 2 stories of the building, leaving the space temporarily vacant. If the real estate firm considers moving its own offices into this 40-story office building, what cost should it assign for the space? Is the cost of the vacant space zero because the firm paid for the building long ago, a cost that is sunk, or is there an incremental opportunity cost? 15. Suppose that an analyst makes a mistake and calculates the NPV of an investment project by discounting the project's contribution to net income each year rather than by discounting its relevant cash flows. Would you expect the NPV based on net income to be higher or lower than the NPV calculated using the relevant cash flows? 4