BU393 Chapter Notes - Chapter 8: Tax Shield, Operating Cash Flow, Net Present Value
Document Summary
Chapter 8 net present value and capital budgeting. In calculating the npv of a project, only cash flows that are incremental to the project should be used. Incremental cash flows the changes in the firm"s cash flows that occur as a direct consequence of accepting the project. We are interested in the difference between the cash flows of the firm with and without the project. Sunk cost cost that has already occurred they are in the past and cannot be changed by the decision to accept or reject the project. Opportunity cost other opportunities the firm forgoes by a decision. Another difficultly in determining incremental cash flows comes from the side effects of the proposed project on other parts of the firm a side effect is a synergy. Synergy occurs when a new project increases the cash flows of existing projects.
