finance-PSet4_Solutions - Coursera Wharton Foundation...

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Coursera Wharton Foundation Series Introduction to Corporate Finance Professor Franklin Allen Problem Set 4 Solutions 1. The main point is that incremental cash flows are what we need to consider, when evaluating financial decisions and capital budgeting. Therefore, sunk costs are in the past so not an incremental cash flow, and hence they should be ignored. Statement A is correct . The incidental effects (for example, the impact of a branch store on the business of the main store) do affect incremental cash flows, so they should be accounted for in the analysis. Statement B is correct . Interest and dividend payments should be ignored when calculating cash flows, since we are evaluating just the investment decision itself, and not the financing decision. The cash flows themselves therefore should not reflect interest and dividend payments; the opportunity cost of capital used to discount the cash flows reflects these financial costs already. Statement C is incorrect .
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