Cash_Flow_Estimation_Power_Point - Cash Flow Estimation...

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Unformatted text preview: Cash Flow Estimation Basic Concepts 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 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 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?) Externalities...
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This note was uploaded on 10/04/2011 for the course FINANCIAL 0102 taught by Professor Econ during the Spring '10 term at University of Minnesota Crookston.

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Cash_Flow_Estimation_Power_Point - Cash Flow Estimation...

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