RSM230H1 Lecture Notes - Lecture 3: Cash Flow, Sunk Costs, Working Capital
Document Summary
Incremental cash flows = total cash flows if project undertaken - total cash flows if not undertaken. Cash flow = inflows - outflows = project revenues - actual cash expenses - capital expenditure - income taxes. Only include overhead costs that are incurred because of project. Include changes in existing flows resulting from firm"s decision. Adjust cash flows to reflect additional working capital requirements associated with project. Cash flow from reduced cost of storing inventory. Working capital changes net out to zero; pv of working capital changes do not net out to zero. Unless impact on cash flows can be estimated. If you don"t launch new product, they will, and erode your profit. If you lose profit either way, loss is not incremental. Consider effects of project interdependencies on cash flow estimates. Use real discount rate and real cash flows, or nominal and nominal. Assess impact of inflation on sales and expenses.
