Answered: Q- Explain the below elements of cash…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 3E

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Q- Explain the below elements of cash Onflow: (Note: First one (a) is as example for you)

a- Purchase of New Equipment: A typical project usually involves a cash outflow in the form of an initial investment in equipment. The relevant investment costs are incremental ones, such as the cost of the asset, shipping and installation costs, and the cost of training employees to use the new asset. If the purchase of a new asset results in the sale of an existing asset, the net proceeds from this sale reduce the amount of the incremental investment. In other words, the incremental investment represents the total amount of additional funds that must be committed to the investment project. When existing equipment is sold, the transaction results in an accounting gain or loss, which is dependent on whether the amount realized from the sale is greater or less than the equipment’s book value. In either case, when existing assets are disposed of, the relevant amount by which the new investment is reduced consists of the proceeds of the sale, adjusted for tax effects.

b- Investment in Working Capital:
c- Manufacturing, Operating, and Maintenance Costs:
d- Leasing Expenses.
e- Interest and Repayment of Borrowed Funds.
f- Income Taxes

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