Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
By Donglin Li || |
Some points to remember in
calculating cash flows
3 Focus on incremental cash flowsƜthe
difference in cash flows because of this
project
3 Forget sunk costsƛ costs that have
accrued in the past
By Donglin Li ||
Some points to remember in
calculating cash flows
3 Include opportunity costsƛ costs of highest
potential benefits forgone by taking this
project
3 Consider incidental effectsƜ(also called side
effects, externality)
3 Positive side effects ƛ benefits to other projects
3 Negative side effects ƛ costs to other projects
By Donglin Li ||
Asking the Right Question
3 ou should always ask yourself ƠWill this
cash flow occur ONL if we accept the
project?ơ
3 If the answer is Ơyesơ, it should be included in the
analysis because it is incremental
3 If the answer is Ơnoơ, it should not be included in
the analysis because it will occur anyway
3 If the answer is Ơpart of itơ, then we should include
the part that occurs because of the project
By Donglin Li ||
Sunk costs
3 `he sunk cost is past cost and
irreversible. Since it cannot be affected
by the decision to accept or reject the
project, it should be ignored.
3 Is your education cost so far at SFSU
sunk cost?
By Donglin Li ||
ou plan to produce ice cream using
some facility that you bought at $50,000
last year.
3 Should this $50,000 cost from the
previous year be included in the
analysis?
By Donglin Li ||
Opportunity cost
3 `he highest benefit forgone when you
take a project
3 `he opportunity cost may be relevant to
the investment decision even when no
cash changes hands.
3 Give me an example about the
opportunity cost of studying at SFSU?
By Donglin Li ||
ou plan to use the facility to produce ice creams.
`he facility could be leased out for $25,000 per
year, would this affect the analysis?
3 es, by accepting the project, the firm
foregoes a possible annual cash flow of
$25,000, which is an to
be charged to the project.
3 `he relevant cash flow is the annual after-
tax opportunity cost.
3 A-` opportunity cost = $25,000 (1 ƛ `)
= $25,000(0.6)
= $15,000
3 Opportunity cost is relevant.
By Donglin Li ||
Incidental Effects (Externality)
3 `he Ơside effectsơ of taking a project.
3 Give me an example of incidental effect
if you got a degree from SFSU.
By Donglin Li || |
If the ice cream production were to decrease
the sales of the firmƞs other lines (for example,
ogurt), would this affect the analysis?
By Donglin Li || ||
Evaluating NPV Estimates
3 `he NPV estimates are just that ƛ estimates
3 A positive NPV is a good start ƛ now we need
to take a closer look
3 Forecasting risk ƛ how sensitive is our NPV
By Donglin Li || |
(Skip)
3 types of project risk
(Stand-alone risk, Corporate risk, Market risk)
3 Sensitivity analysis
3 Scenario analysis
3 Monte Carlo analysis
3 Real Option
By Donglin Li || |
Exercise Questions
A cost that has already been paid, or the
liability to pay has already been incurred,
is a(n):
a. Salvage value expense.
b. Net working capital expense.
c. Sunk cost.
d. Opportunity cost.
By Donglin Li || |
ou bought some real estate 6 years ago for $25,000, and
you are thinking of using this land for the construction of a
new warehouse as part of a production expansion project.
3 ou include the $25,000 purchase cost of the
land as an initial cost in the capital budgeting
process. By doing so, you are making the
mistake of in the decision-
making process.
By Donglin Li || |
Incremental cash flows refer to:
By Donglin Li || |
Which of the following should be included
in an analysis of a new project?
By Donglin Li ||
Adams Audio is considering whether to make an
investment in a new type of technology.
By Donglin Li || |