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FIN 300 (120)

FIN30 ch 10

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FIN 300
Cynthia Holmes

Chapter 10Making capital investment decisions Relevant Cash Flows 101incremental cash flows changes to a firms future cash flows that are a direct consequence of taking the projectstandalone principle allows us to analyze each project in isolation from the firm simply by focusing on incremental cash flows o Its like the project is its own minifirm with its own revenues costs assets and liabilities o project is analyzed on its own merits Asking the Right Questionask yourself Will this cash flow occur or not occur ONLY if we accept the project o If the answer is yes it should be included in the analysis because it is incremental o If the answer is no it should not be included in the analysis because it will occur anyway o If the answer is part of it then we should include the part that occurs or does not occur because of the project EX Mad Mexican case Culinary student at George Brown started selling fresh chips and salsa from a table at St Lawrence market under the brand name Mad MexicanDid preparation at home himself Opened a restaurant called Frida used that kitchen for the Mad Mexican production work In 2010 he opened a new production kitchen for Mad Mexican6 employeesProducts carried in about 50 Torontoarea gourmet grocers If we are analyzing the decision about whether to open a production kitchen then which cash flows are relevant to the analysis On the revenue side the choices would be All Mad MexicanFrida revenues All Mad Mexican sales revenues only The increase in sales associated with the new kitchen only not ALL Mad Mexican salesOn the cost side which should be includedThe onetime upfront capital costs associated with setting up the new kitchen The annual rent for the new kitchen space The total cost the ingredients for all Mad Mexican sales The cost of the ingredients for the portion of sales associated with the new kitchen
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