ECON 2560 Chapter Notes - Chapter 9: Capital Cost Allowance, Capital Budgeting, Operating Cash Flow

• School: University of Guelph
• Department: Economics
• Course: ECON 2560
• Professor: Ilias Tsiakas

Document Summary

Using discounted cash flow analysis to make investment decisions: Discount incremental cash flows: proje(cid:272)t"s pv depe(cid:374)ds o(cid:374) e(cid:454)tra (cid:272)ash flo(cid:449)s that it produ(cid:272)es, forecast cash flows if you do accept project, the(cid:374) fore(cid:272)ast (cid:272)ash flo(cid:449)s if (cid:455)ou do(cid:374)"t a(cid:272)(cid:272)ept (cid:272)ash flo(cid:449)s. Incremental cash flow = cash flow with project cash flow without project. Forget sunk costs: past, and irreversible outflows, e. g. if fir(cid:373) spe(cid:374)ds (cid:373)o(cid:374)e(cid:455) o(cid:374) market resear(cid:272)h that is a su(cid:374)k (cid:272)ost, should not be considered in the costs of the project. Include opportunity costs: resources are almost never free, even when no cash changes hands, value of forgone opportunity. Remember shut down cash flows: end of a project almost always brings additional cash flows, not all shutdown cash flows are negative though. Beware of all allocated overhead costs: rent, heat, electricity, etc. Discount nominal cash flows by nominal cost of capital: distinction between nominal and real cash flows and interest rates is crucial in capital budgeting.