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    manishasain
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    When determining incremental cash flows from new projects, there are several issues to consider: 1) Sunk costs, which are initial outlays that cannot be recovered if a project is rejected, should be excluded. 2) Opportunity costs, such as forgone revenue from alternative uses of assets, should be included. 3) Externalities, or effects on existing operations, like whether a new product cannibalizes an existing product's sales, must be accounted for. 4) Changes in net working capital from additions to current assets or current liabilities also impact cash flows.

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    When determining incremental cash flows from new projects, there are several issues to consider: 1) Sunk costs, which are initial outlays that cannot be recovered if a project is rejected, should be excluded. 2) Opportunity costs, such as forgone revenue from alternative uses of assets, should be included. 3) Externalities, or effects on existing operations, like whether a new product cannibalizes an existing product's sales, must be accounted for. 4) Changes in net working capital from additions to current assets or current liabilities also impact cash flows.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca DOCX, PDF, TXT sau citiți online pe Scribd
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    39 vizualizări2 pagini

    Finance

    Încărcat de

    manishasain
    When determining incremental cash flows from new projects, there are several issues to consider: 1) Sunk costs, which are initial outlays that cannot be recovered if a project is rejected, should be excluded. 2) Opportunity costs, such as forgone revenue from alternative uses of assets, should be included. 3) Externalities, or effects on existing operations, like whether a new product cannibalizes an existing product's sales, must be accounted for. 4) Changes in net working capital from additions to current assets or current liabilities also impact cash flows.

    Drepturi de autor:

    Attribution Non-Commercial (BY-NC)
    Descărcați ca DOCX, PDF, TXT sau citiți online pe Scribd
    Indicator pentru conținut neadecvat
    din 2

    in determining incremental cash flows from a new project, problems arise, such as: 1.Sunk costs 2.

    Opportunity costs 3.Externality 4.Cannibalization 1.Sunk Costs These are the initial outlays required to analyze a project that cannot be recovered even if a project is accepted. As such, these costs will not affect the future cash flows of the project and should not be considered when making capital-budgeting decisions. Suppose Newco is considering whether to make an addition to its current plant to increase production. To determine if the new addition is worthwhile, Newco hired a consulting firm for $50,000 to analyze the addition and the effect it will have on production. The $50,000 is considered a sunk cost. If the project is rejected, the $50,000 will still be paid, and if the project is accepted, the $50,000 will not affect the future cash flows of the addition. 2.Opportunity Cost This is the cost of not going forward with a project or the cash outflows that will not be earned as a result of utilizing an asset for another alternative. For example, the opportunity cost of Newco's new addition considered above is the cost of the land on which Newco is considering putting the new plant addition. As such, it should be included in the analysis of the project. 3.Externality Additionally, in the consideration of incremental cash flows of a new project, there may be effects on the existing operations of the company to consider, known as "externalities". For example, the addition to Newco's plant is for the purpose of producing a new product. It must be considered if the new product may actually take away or add to sales of the existing product. 4.Cannibalization This is the type of externality where the new project takes sales away from the existing product. Changes in Net Working Capital A change in net working capital is essentially the changes in current assets minus changes in current liabilities. Within the capital-budgeting process, a project typically adds to current assets given additional inventories or potential increases in accounts receivables from new sales. The increases to current assets, however, are offset by current liabilities needed to finance the new project. Overall, there may be change to net working capital from the new project.

    If the change in net working capital is positive, the change to current assets outweighs the change in the current liabilities. If, however, the change in net working capital is negative, the change to current liabilities outweighs the change in current assets.

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