Why do we only include free cash flows when evaluating a project using the NPV project evaluation method? Select one: a. Because only free cash flows are tax-deductible. b. Because free cash flows exclude financing costs, because these are included in the cost of capital which is the discount rate used to determine the NPV. c. Because free cash flows are always positive cash inflows. d. Because free cash flows do not cost the firm anything.

Why do we only include free cash flows when evaluating a project using the NPV project evaluation method? Select one: a. Because only free cash flows are tax-deductible. b. Because free cash flows exclude financing costs, because these are included in the cost of capital which is the discount rate used to determine the NPV. c. Because free cash flows are always positive cash inflows. d. Because free cash flows do not cost the firm anything.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section11.1: Identifying Relevant Cash Flows

Problem 3ST

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

(7.1)

Why do we only include free cash flows when evaluating a project using the NPV project evaluation method?

Select one:

Because only free cash flows are tax-deductible.

Because free cash flows exclude financing costs, because these are included in the cost of capital which is the discount rate used to determine the NPV.

Because free cash flows are always positive cash inflows.

Because free cash flows do not cost the firm anything.

Definition Definition Cash that is left over after a company has paid for its operating and capital expenses. Unlike net income or earnings, free cash flow excludes non-cash expenses of the income statement and includes the expenditures on equipment and assets. Free cash flow also helps potential shareholders to evaluate how quickly the company can pay interest and dividends.

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