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approach defines OCF as sales minus cash costs minus taxes, and is useful ifone has reliable estimates of the relevant dollar costs (perhaps in a situationwhere fixed and variable costs are the focus of the analysis). Finally, the tax-shield approach separately illustrates a project's benefits associated withaftertax gross profit (revenue gains and/or cost reductions) and thedepreciation tax shield.Difficulty Level: 3 HardTopic: OCF86. When is it appropriate to use the equivalent annual cost (EAC)methodology, and how do you make a decision using it? The EAC should be used to evaluate two or more mutually exclusive projectswith different lives that will be replicated essentially forever. The managershould choose the least costly option, i.e., the project with least negative EACvalue.Difficulty Level: 3 HardTopic: Equivalent Annual Cost87.Should financing costs be included as an incremental cash flow in capital
budgeting analysis? Financing costs are not an incremental cash flow for capital budgetingpurposes. Financing costs are a direct consequence of how the project isfinanced, not whether the project is economically viable. Financing costs areembedded in the required rate of return used to discount project cash flows.Difficulty Level: 3 HardTopic: Financing Costs