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Cash_Flow_Estimation_Power_Point - Cash Flow Estimation...

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Cash Flow Estimation Basic Concepts
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Overview Most difficult aspect of capital budgeting Long time frame Leads to uncertainty Typical bias: overstate revenues and understate  costs Nevertheless, it must be carried out
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Relevant Cash Flows Only These are called “incremental” cash flows That is, the CF’s that occur due to the  undertaking of the project Thus, “sunk costs” (expenditures already made)  must NOT be included Ex: Mktg study is done about feasibility ($8,000)  before doing the project Do not include $8,000 into the CF’s
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Opportunity Costs They must be included, though can be difficult to  calculate “What could have been earned otherwise” or  “best alternative if not this project” EX: Use your own land to build the factory Must include the opportunity cost of the land  (what could you have rent it for?)
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