Podcast
Questions and Answers
The first step in estimating cash flow is to determine the _________ cash flows.
The first step in estimating cash flow is to determine the _________ cash flows.
relevant
The difference between a firm's cash flows with a project versus without the project is called ________________.
The difference between a firm's cash flows with a project versus without the project is called ________________.
- Additional cash flows
- Differential cash flows
- Net cash flows
- Incremental cash flows (correct)
The stand-alone principle assumes that evaluation of a project may be based on the project's ________________ cash flows.
The stand-alone principle assumes that evaluation of a project may be based on the project's ________________ cash flows.
incremental
Sunk costs are costs that ____.
Sunk costs are costs that ____.
Opportunity costs are ____.
Opportunity costs are ____.
One of the most important steps in estimating cash flow is to determine the _________ cash flows.
One of the most important steps in estimating cash flow is to determine the _________ cash flows.
The most valuable alternative that is given up if an investment is undertaken is called what?
The most valuable alternative that is given up if an investment is undertaken is called what?
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.
Erosion will ______ the sales of existing products.
Erosion will ______ the sales of existing products.
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a 'minifirm.'
According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a 'minifirm.'
Which of the following are considered relevant cash flows?
Which of the following are considered relevant cash flows?
Which of the following is an example of a sunk cost?
Which of the following is an example of a sunk cost?
True or false: Investment in net working capital may arise from the need to cover credit sales.
True or false: Investment in net working capital may arise from the need to cover credit sales.
Opportunity costs are classified as ____ costs in project analysis.
Opportunity costs are classified as ____ costs in project analysis.
Which of the following is an example of an opportunity cost?
Which of the following is an example of an opportunity cost?
True or false: In calculating cash flows, you should consider all financing costs.
True or false: In calculating cash flows, you should consider all financing costs.
Cash flows used in project estimation should always reflect:
Cash flows used in project estimation should always reflect:
Side effects from investing in a project refer to cash flows from:
Side effects from investing in a project refer to cash flows from:
Investment in net working capital arises when ___.
Investment in net working capital arises when ___.
To prepare pro forma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required.
To prepare pro forma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required.
Which of the following are fixed costs?
Which of the following are fixed costs?
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
Which of the following are components of project cash flow?
Which of the following are components of project cash flow?
Estimates of which of the following are needed to prepare pro forma income statements?
Estimates of which of the following are needed to prepare pro forma income statements?
True or false: Fixed costs cannot be changed over the life of the investment.
True or false: Fixed costs cannot be changed over the life of the investment.
Given a level of investment in net working capital, that same investment must be at some time in the future ________.
Given a level of investment in net working capital, that same investment must be at some time in the future ________.
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
Operating cash flow is a function of:
Operating cash flow is a function of:
What approach does the following formula describe? OCF = (Sales - Costs) x (1-TC) + Depreciation x TC
What approach does the following formula describe? OCF = (Sales - Costs) x (1-TC) + Depreciation x TC
Side effects from investing in a project refer to cash flows from:
Side effects from investing in a project refer to cash flows from:
True or false: Net working capital will be recovered at the end of a project.
True or false: Net working capital will be recovered at the end of a project.
True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.
True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.
Estimates of which of the following are needed to prepare pro forma income statements?
Estimates of which of the following are needed to prepare pro forma income statements?
The depreciation tax ___ is the tax savings that results from the depreciation deduction.
The depreciation tax ___ is the tax savings that results from the depreciation deduction.
Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
The possibility that errors in projected cash flows will lead to incorrect decisions is known as:
The possibility that errors in projected cash flows will lead to incorrect decisions is known as:
Study Notes
Cash Flow Fundamentals
- Relevant cash flows are crucial for estimating cash flow; they directly affect project evaluation.
- Incremental cash flows represent the difference in cash flows with and without a project and are integral for decision-making.
Project Evaluation Principles
- The stand-alone principle allows projects to be analyzed independently using their incremental cash flows, ensuring accurate evaluation based on specific projects alone.
- Sunk costs refer to expenses that have already been incurred and will not influence future project decisions, hence should be ignored in financial analysis.
Opportunity Costs
- Opportunity costs reflect the potential benefits that are lost when choosing one investment over another.
- Relevant opportunity costs must be considered in project analysis as they impact the overall profitability and viability of the investment.
Cash Flow Estimation Techniques
- Estimating cash flows involves identifying sources such as operating cash flows, net working capital investments, and possible erosion of sales from existing products.
- Accurate estimations require after-tax cash flows to capture the true financial impact of a project.
Financial Projections
- Preparing pro forma financial statements necessitates forecasts of sales, pricing, variable costs, and total fixed costs, which are essential for assessing project viability.
- Fixed and variable costs must be clearly identified, as they influence cash flow calculations.
Cash Flow Components
- Key components of project cash flow include capital spending, operating cash flow, and changes in net working capital.
- Operating cash flow is primarily derived from earnings before interest and taxes (EBIT), with adjustments for depreciation and taxes.
Financial Metrics and Techniques
- Various investment criteria can be used to evaluate estimated cash flows, including Net Present Value (NPV), Internal Rate of Return (IRR), and payback period assessments.
- The Depreciation Tax Shield Approach helps quantify tax savings resulting from depreciation, which is crucial for assessing cash flow impact.
Risks in Cash Flow Projections
- Estimation risk and forecasting risk highlight the uncertainties in projected cash flows, potentially leading to poor decision-making.
- Accurate cash flow forecasting is vital: operating cash flows from net sales are particularly challenging yet critical to predict long-term project success.
Key Insights
- Side effects from investments, such as erosion effects and beneficial spillover effects, need to be evaluated as they impact overall project cash flows.
- Net working capital invested in a project is expected to be recovered post-project, which is a key consideration in cash flow analysis.
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Description
Test your knowledge on key finance concepts with these smartbook flashcards. This quiz covers important terms related to cash flow estimation and incremental cash flows. Each card presents a definition to reinforce your understanding.
