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What is an incremental cash flow?
The difference between a firm's future cash flows with a project and without the project.
What is the stand-alone principle?
Evaluation of a project based on the project's incremental cash flows (on its own).
What is the effect of undertaking a project?
To change the firm's overall cash flow today and in the future.
What is a relevant cash flow for a project?
A change in the firm's overall future cash flow that comes about as a direct consequence of the decision to take the project.
What do the incremental cash flows for a project evaluation consist of?
Any and all changes in the firm's future cash flows that are a direct consequence of taking the project.
What is a sunk cost?
A cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.
What is an opportunity cost?
the most valuable alternative that is given up if a particular investment is undertaken.
What is erosion?
the portion of cash flows of a new project that come at the expense of a firm's existing operations
What is the capital cost allowance (CCA)?
Depreciation method under Canadian tax law allowing for the accelerated write-off of property under various classifications.
Two things about erosion....
1) Cash flows from a new line should be adjusted downwards to reflect lost profits on other lines.
2)Only relevant when the sales would not otherwise be lost.
What do you do when analyzing a proposed investment?
Do not uncluder interest paid or any other financing costs (dividends, principal repaid).
What are pro forma financial statements?
financial statements projection future years operations.
How do you get the project cash flow?
Project operating cash flow - project additions to NWC - project capital spending
How do you get operating cash flow?
EBIT + depreciation - taxes
Finance 258 Ch.10