25300 Study Guide - Final Guide: Sunk Costs, Tax Deduction, Cash Flow
Document Summary
Capital budgeting 2: calculate the relevant incremental cash flows for capital budgeting. Quality of npv = reflection of quality of cash flow estimates. Must decide what is a cash flow item and whether it is incremental or not. *incremental cf"s are changes in cf"s that occur from accepting project. If a cf doesn"t change, we don"t include it in our analysis. Difference accounting & finance views of capital budgeting. Financial manager is interested in timing of cf"s, not revenue/expenses: why financing cash flows & sunk costs shouldn"t be included. Sunk cost: expense paid previously and cannot be recovered (irrelevant) Financing cost: interest payments (already included into discount rate) so therefore not included, as they would be double counted. Only interested in the cf"s generated by the assets of the project: understand opportunity cost and cash flow implications. Opportunity cost: cf"s an asset could generate if not used in a proposed investment. (requires us to give up a benefit)
