FINANCE 300 : Fin3
29 Oct 2014
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In previous chapter you were given cash flows. In this chapter we calculate these cash flows. The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted. These cash flows are called incremental cash flows. The stand-alone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows. Cash flows are considered when they occur, not when we make an accounting entry. E. g. taxes occur when we pay them not when we record them in our financial statements. Only consider those cash flows which occur as a result of undertaking the project. Use nominal cash flows (we are discounting by a nominal discount rate). Only include overhead costs that increase as a result of undertaking the project. Depreciation is not a cash flow and should not be included in cash flow analysis.
