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a.
To identify: The items that should be treated as incremental cash flow when computing the
Incremental Cash Flow:
The addition to the current cash flow of the company based on the acceptance of the new project or expansion plan is called additional cash flow. It is used to evaluate the financial viability of different alternatives.
Opportunity cost means the cost of missed opportunity. It refers to the advantage that a company could have gained, but gave up, to take an alternative action.
b.
To identify: The items that should be treated as incremental cash flow when computing the net
c.
To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is research cost in relation to product in the last 3 years.
Sunk Cost:
Sunk cost means that cost that has been incurred in the past and has no effect on the future project. It is that cost that is related to past events that cannot be recovered and is irrelevant for the new projects of a company.
d.
To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is annual expense of
e.
To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is dividend payments.
f.
To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, items are plant and equipment resale value end of project life.
g.
To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, items are medical costs and salary given to production personnel.
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Chapter 6 Solutions
Corporate Finance
- In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following except __________. a. changes in working capital resulting from the project, net of spontaneous changes in current liabilities b. changes in costs due to a general appreciation in those costs c. the amount (net of taxes) that we could realize from selling a currently unused building of ours that we intend to use for our project d. costs that have previously been incurred that are unrecoverablearrow_forwardJoetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment required in equipment Annual cash inflows Salvage value of equipment Life of the investment Required rate of return Multiple Choice The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. The internal rate of return of the investment is closest to: O O O 27% 25% 23% $37,000 $ 8,800 $ 21% 0 15 years 10 %arrow_forwardwhich of the following should not be included in the cash flows for project analysis? Opportunity costs side effects or erosion sunk costs operating cash flows for all years The initial investment in net working capitalarrow_forward
- Which of the following cash flows are not considered in the calculation of the annual cash-flow for a capital investment proposal? Incremental costs. O Taxes. O Depreciation on the project. Proceeds from selling an old asset which is being replaced by a new asset. Change in revenue.arrow_forward4) Which of the following cash flows should be excluded from a net present value evaluation of an investment project? A) An increase in fixed costs due to leasing a new building for the project. B) An increase in debtors and stocks expected to occur as a result of undertaking the project. C) The purchase cost of materials that can be used in the project but that the company uses regularly in other operations. D) Interest charges on a loan taken out to finance the projectarrow_forwardConsider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 −$29,000 −$29000 1 14,400 4,300 2 12,300 9,800 3 9,200 15,200 4 5,100 16,800 a) What is the Internal Rate of Return (IRR) for each of these projects? b) Using the IRR decision rule, which project should the company accept? c) If the required return is 11 percent, what is the Net Present Value (NV) for each of these projects? d) Using the NPV decision rule, which project should the company accept? e) Why do you think the NPV and IRR rules do not agree on same project approval/rejection direction?arrow_forward
- Which of the following statements is true? I. In the payback method, depreciation is added back to net operating income when computing the annual net cash flow. II. When a company is cash poor, a project with a short payback period but a low rate of return may be preferred to a project with a long payback period and a high rate of return. III. A shorter payback period does not necessarily mean that one investment is more desirable than another. Only statement III is true. O All of the statements are true. None of the statements are true. Only statement I is true.arrow_forwardChanges in the net working capital: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. are included in project analysis only if they represent cash outflows. D. are generally excluded from project analysis due to their irrelevance to the total project. E. affect the initial and the final cash flows of a project but not the cash flows of the middle years. Can you help me explain the answer?arrow_forwardThe payback period is a non - discounted cash flow technique that measures: a. The time required to recover the initial investment b. The profitability of the project c. The net present value of the project d. The internal rate of return of the projectarrow_forward
- HELP MEarrow_forwardThe AW of a project can be estimated by reducing all cash flows including the capital investment, salvage value in terms of annualized cash flows at an interest rate( i). Select one: True Falsearrow_forwardNet Present Value Method for a Service Company Carnival (CCL) has recently placed into service some of the largest cruise ships in the world. One of these ships, the Carnival Breeze, can hold up to 3,600 passengers, which can cost $750 million to build. Assume the following additional information: • There will be 340 cruise days per year operated at a full capacity of 3,600 passengers. variable expenses per passenger are estimated to be $100 per cruise day. • The revenue per passenger is expected to be $280 per cruise day. • The fixed expenses for running the ship, other than depreciation, are estimated to be $90,000,000 per year. • The ship has a service life of 10 years, with a residual value of $60,000,000 at the end of 10 years. Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335…arrow_forward
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
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