Relevant Cash Flows

Relevant Cash Flows - 3) Opportunity Costs Consider * MUST...

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Relevant Cash Flows (CFs) Incremental CFs:  additional   cash  in minus  additional  cash out.  Capital budgeting focuses on the  INCREMENTAL cash flows! 1) Incidental CFs—Consider  * Directly and indirectly related;  “cannibalization” 2) Sunk Costs—Ignore  * Do NOT consider; irrelevant to  decision; irretrievable * Example:  Nuclear Power Plant  * Original Estimate= Plant: 8 years;  $2 billion * 6 years later: Spent $2.2 B,  Need  3 more years: $1.1 B Total * What’s important? $2.2 B spent  or $3.3 B total cost? * Relevant Cash Flows (CFs)
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Incremental CFs:  additional   cash  in minus  additional  cash out.  Capital budgeting focuses on the  INCREMENTAL cash flows! 1) Incidental CFs—Consider  * Directly and indirectly related;  “cannibalization” 2) Sunk Costs—Ignore  * Do NOT consider; irrelevant to  decision; irretrievable
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Unformatted text preview: 3) Opportunity Costs Consider * MUST consider; relevant to decision; finite capacity * Old Test Question Marshalls & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000 . The lot was recently appraised at $810,000 . At the time of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million . What amount should be used as the initial cash flow for this building project? a. $1,200,000 b. $1,840,000 c. $1,890,000 d. $2,010,000...
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Relevant Cash Flows - 3) Opportunity Costs Consider * MUST...

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