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Investmen in Asset

Tax depreciation is initially deducted and then added back when determining incremental net cash flow for a period because it is a non-cash expense. Sunk costs like the market value of an old machine or shipping costs should be ignored when estimating initial cash outflow but included in depreciable basis. Past sunk costs are ignored when estimating expected cash flows because only future cash flows are relevant to capital budgeting decisions. Inflation adjustments include using real rather than nominal cash flows and discount rates. Larger capital expenditures require higher management approval and more supporting information to properly evaluate large investments. A product expansion introduces a new product while an equipment replacement maintains existing production capabilities.

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47 views1 page

Investmen in Asset

Tax depreciation is initially deducted and then added back when determining incremental net cash flow for a period because it is a non-cash expense. Sunk costs like the market value of an old machine or shipping costs should be ignored when estimating initial cash outflow but included in depreciable basis. Past sunk costs are ignored when estimating expected cash flows because only future cash flows are relevant to capital budgeting decisions. Inflation adjustments include using real rather than nominal cash flows and discount rates. Larger capital expenditures require higher management approval and more supporting information to properly evaluate large investments. A product expansion introduces a new product while an equipment replacement maintains existing production capabilities.

Uploaded by

florentina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1.

When relevant project cash flows are examined, why is an increase in tax depreciation at

first deducted and then later added back in determining incremental net cash flow for a

period?

2. In capital budgeting, should the following be ignored, or rather added or subtracted from

the new machine’s purchase price when estimating initial cash outflow? When estimating

the machine’s depreciable basis?

a. The market value of the old machine is $500, the old machine has a remaining useful

life, and the investment is a replacement decision.

b. An additional investment in inventory of $2,000 is required.

c. $200 is required to ship the new machine to the plant site.

d. A concrete foundation for the new machine will cost $250.

e. Training of the machine operator will cost $300.

3. In determining the expected cash flows from a new investment project, why should past

sunk costs be ignored in the estimates?

4. Discuss the adjustments in the capital budgeting process that should be made to compensate for
expected inflation.

5. What is the purpose of requiring more levels of management approval, the larger the

proposed capital expenditure? Is more information also required in support of the

request?

6. What is the difference between a product expansion and an equipment replacement

investment?

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