Fundamentals of Capital Budgeting - Other Effects on Incremental Free Cash Flows

15 important questions on Fundamentals of Capital Budgeting - Other Effects on Incremental Free Cash Flows

When a firm has no use for a resource other than one single project, what are the opportunity costs of that resource?

The price received if sold or rented out

What are Project Eternalities?

Indirect effects of a project that may increase or decrease the profits of other activities

Give an example of a cannibalization project externality

Since the iPhone also functions as an iPod, the former decreases sales of the latter
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What is a sunk cost?

A unrecoverable cost for which the firm is already liable

In what situation does sunk costs influence free cash flows?

None

What are overhead expenses?

Expenses associated with activities that are not directly attributable to a single business activity

What overhead expenses should be taken into account when analyzing a project?

Only the incremental overhead expenses

What is MARCS depreciation?

The most accelerated cost recorvery system allowed by the IRS

What is the salvage value of an asset?

The value of an asset if choosen to sell

What is another term for liquidation value?

Salvage value

How is capital gain calculated when an asset is liquidated?

Capital Gain = Sale Price - Book Value

What is the Book Value of an Asset? (formula)

Book Value = Purchase Price - Accumulated Depreciation

How do you calculate the influence the liquidation of an asset has on the projects free cash flows?

After-Tax Cash Flow from Asset Sale = Sale Price - (Tax Rate x Capital Gain)

What are tax loss carryforwards and - carrybacks?

Features in the tax code that allow corporations to carry back losses for two years, and carry forward losses for twenty years

What happens when a firm carries back losses?

It gets a refund of payed taxes

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