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Mini in Finance and Accounting - Case Study Example

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Finance and Accounting – Mini Case Finance and Accounting – Mini Case a. In making its capital-budgeting decisions, Caledonia Products focuses more on cash flows than its accounting profits. The cash flows are what the firm receives and what it can reinvest…

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Mini in Finance and Accounting

The incremental cash flows constitute the marginal benefit from the project. Therefore, the incremental cash flows are the increased value to the firm from accepting the project. It is suitable to take the total free cash flow into account rather than taking the total profits. b. Cash flow items do not include depreciation. However, depreciation affects the cash flows at various levels on the life of the project as it has effects on taxes, which in turn impacts the cash flows (Business Accounting Guide). Depreciation comes under the expenses items and when the amount of depreciation incurred increases, the expenses also increase in proportion. On such a situation, the accounting profits get diminished. c. The sunk costs are ignored while assessing the capital budgeting proposal. The company as a whole concentrates only on the incremental after-tax cash flows, or free cash flows. The decision made on the investment at hand is not regarded as the sunk cost that would have already incurred. They are irrelevant and are not incremental cash flows and so they do not affect the determination of cash flows. d. The project’s initial cash outlay can be calculated by using the following formulae. ...
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