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Chapter 11
Cash Flows and Capital Budgeting
Self Study Problems
11.2
In calculating the NPV of a project, should we use all of the after-tax cash flows associated
with the project, or incremental after-tax cash flows from the project? Why?
Solution:
We should use incremental cash flows of the project. Incremental cash flows reflect the
amount by which the firm’s total cash flows will change if the project is adopted. In other
words, incremental cash flows represent the net difference in cash revenues, costs, and
investment outlays (in net working capital and capital expenditures) at the firm level with and
without the project, which is precisely what the stockholders care about.
11.3
You are considering opening another restaurant in the TexasBurgers chain. The new
restaurant will have annual revenue of $300,000 and operating expenses of $150,000. The
annual depreciation and amortization for the assets used in the restaurant will equal $50,000.
An annual capital expenditure of $10,000 will be required to offset wear-and-tear on the
assets used in the restaurant, but no additions to working capital will be required. The
marginal tax rate will be 40 percent. Calculate the incremental annual free cash flow for the
project
Solution:
The incremental annual free cash flow is calculated as:
