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Solved in 3 steps
- Which of the following cash flows should not be considered when evaluating a project? Changes in working capital Shipping and installation costs Sunk costs Opportunity costs ExternalitiesExplain why depreciation and interest should not be included as costs in a discountedcash flow (DCF) analysis of a project.Depreciation is a noncash expense: why is it considered when estimating a project net cash flows?
- (b) Although depreciation is not a cash flow item, it plays an important role in thecalculation of cash flow. Describe the impact of depreciation on a project’s cash flow.Demonstrates the difference between depreciation costs as expenses and the cash flow generated by the purchase of a fixed asset? Give an example?Which of the following is NOTa relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? a. Shipping and installation costs. b. Cannibalization effects. c. Opportunity costs. d. Sunk costs that have been expensed for tax purposes. e. Changes in net working capital. Please explain your answer for better understanding.
- “When evaluating projects, we’re concerned with only the relevant incremental after-tax cash flows. Therefore, because depreciation is a non-cash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.Which of the following is an advantage of using the payback period method for project selection? The payback period method considers the time value of money The payback period method considers accounting income The payback period method shows when funds will be available for reinvestment The payback period method ignores the time value of moneyWhy should companies use a project’s cash flows rather thanaccounting income when determining a project’s NPV?
- Discussion:Is the added precision from including taxes and depreciation in calculating project cash flows worth the effort? Should they be included in the calculations? Please discuss and justify your answer.Why are interest charges not deducted when a projects cash flows are calculated for use in a capital budgeting analysis?What would be a business example that shows how depreciation and accelerated depreciation can affect project cash flows?
