Capital budgeting cash flows

Capital budgeting cash flows

1. 1. Which of the following should be INCLUDED as incremental cash flows in a capital-budgeting NPV?

   Opportunity cost of using a building you already own (instead of renting it)Sunk cost: $2M of market research done before the decisionCannibalization effect on existing product salesInterest expense on debt used to finance the project

2. 2. FCF = NOPAT + D&A − ΔWC − CapEx. Why do we ADD back D&A?

   It's not a real expense at allD&A is a non-cash deduction; NOPAT already subtracted it but no cash actually left the firmAccounting standards require itTo inflate cash flow for valuation purposes

3. 3. A fast-growing firm reports strong net income but is constantly short on cash. The most likely explanation is:

   Accounting errorsExcessive dividendsWorking capital investment (AR and inventory growing faster than collections)Theft

4. 4. A project's year-T+1 FCF is projected at $50M, growing at 2% forever after year T. Cost of capital is 8%. What is the terminal value AT YEAR T (not discounted to today)? Answer in millions.

   $M

5. 5. A new product line is charged $500K of corporate overhead by accounting. The head office, HR, and IT would cost the firm the same whether or not the line launches. How much overhead is an incremental cash flow for the project's NPV?

   $500K, because that is what accounting allocates to the project$0, because that overhead would be incurred anyway and is not caused by the projectHalf, as a reasonable compromise$500K plus a share of future overhead growth