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Chapter 8

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BU393 Chapter 8 – Net Present Value and Capital Budgeting Week 2 Incremental Cash Flows -Finance courses use cash flows -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 -Sunk costs are not incremental cash outflows -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 -The allocated cost should be viewed as a cash outflow of a project only if it is an incremental cost of the proje
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