Question

Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, complete and answer the following questions: The present value of cash flows can be used to determine the basis of a firm's value Ideally, capital budgeting analysis should take cash flows into account on a monthly basis on an annual basis exactly when they occur Understanding the nature or projects Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, complete the following: A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? O A replacement project O An expansion project

Answer 1

1: Cash flows

(We need to determine the present value of cash flows to ascertain the firms value)

2: Exactly when they occur

(The cash flows should be discounted on the basis of their occurrence)

3: Replacement

(The old cares are replaced by new fleet of cars. This is not addition of assets and hence is not expansion)

4: Yes include the value

(The warehouse can be sold for $300,000 which is an opportunity cost lost if it is not sold)

5: Negative

This is a cost that is suffered by a third party as a result of an action