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12 Cards in this Set
- Front
- Back
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Should financing effects be included in estimating cash flows? |
No, Financing effects have already been taken into account because, when calculating NPV, we discount cash flows by the WACC.
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Should a $50,000 improvement cost from the previous year be included in the analysis? |
No, the building improvement cost is a sunk cost |
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Analysis should only include __________.
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incremental investment |
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What is best described by "a cash flow that will occur if and only if the firm takes on a project"?
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incremental investment |
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If the facility could instead be leased out for $25,000 per year, would this affect the analysis? |
Yes, by accepting the project, the firm foregoes a possible annual cash flow of $25,000. Which is an opportunity cost to be charged to the project.
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If the new product line decreases the sales of the firm’s other lines, would this affect the analysis? |
Yes, the effect on other project’s cash flows (CF’s) is an “externality” -Net CF loss per year, on other product lines, would be a cost to this project
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Is a compliment a negative/positive externality? |
positive |
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Is a substitute a negative/positive externality? |
negative |
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If we were to ignore inflation costs while evaluating project NPV and get a negative NPV, could we be making a mistake by rejecting the project? |
Yes, because if there is inflation, then part of the WACC that a firm is “charged” will be made up for with increased prices on the firm’s sales.
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What if there is expected inflation of 5%? is NPV then biased? |
Yes, if there is inflation, then part of the WACC that a firm is “charged” will be made up for with increased prices on the firm’s sales.
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If WACC increases, then value decreases/increases? (because WACC is a denominator)
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decreases |
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What is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected? |
sunk cost |
