Operating cash flows rather than accounting income are listed in Table 12.1. Why do we focus on cash flows as opposed to net income in capital budgeting? Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Operating cash flows rather than accounting income are listed in Table 12.1. Why do we focus on cash flows as opposed to net income in capital budgeting? Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 4Q

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Similar questions

Why are interest charges not deducted when a projects cash flows are calculated for use in a capital budgeting analysis?
In many decisions, the focus is on net income. Accounting net income is based on accrual accounting, which ignores the timing of cash flows. In capital budgeting, however, the timing of cash flows is critical. Why do you think that is? Respond to why agree or disagree with their reason for the criticality of cash flow timing in capital budget decisions.
Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.
When making a capital budgeting decision, which of the following are NOT relevant? The size of a cash flow The risk of a cash flow The accounting earnings from a cash flow The timing of a cash flow Multiple Choice I only II only III only II and III only III and IV only They are all relevant.
Which of the following is NOTa relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? a. Shipping and installation costs. b. Cannibalization effects. c. Opportunity costs. d. Sunk costs that have been expensed for tax purposes. e. Changes in net working capital. Please explain your answer for better understanding.
Why does capital budgeting rely on an analysis of cash flows rather than on net income? Base your answer on the accounting principles of recognizing and reporting revenue and expenses.Describe two capital budgeting decisions based on the time value of money. Which of the two methods would you select for a capital budgeting project and why?
Which of the following should NOT be included as a cash flow in initial, operating or terminal cash flows of a capital budgeting project? A.Opportunity Costs B.Incremental Revenues C.Sunk costs D.Relevant revenues E. Incremental Costs
Explain what a discounted cash flow method of making capital budgeting decisions is. Why are discounted cash flow methods superior to other methods? What are the risks related to using discounted cash flow methods? What a project profitability index? What does it measure? Why is it used? What is the primary criticism of the payback and simple rate of return methods of making capital budget decisions? What are the benefits in using these methods? Should companies continue to use these methods? Why or why not? What role, if any, should qualitative factors play in capital budgeting decisions? Explain your reasoning for your answer Discuss some of the major benefits to be gained from budgeting.