Should Caledonia focus on cash flows or accounting profits in making its capital-budgeting
Decisions?
Should the company be interested in incremental cash flows, incremental profits, total free cash
flows, or total profits?
How does depreciation affect free cash flows?
How do sunk costs affect the determination of cash flows?
What is the projects initial outlay?
What are the differential cash flows over the projects life?
What is the terminal cash flow?
Draw a cash flow diagram for this project.
What is its net present value?
What is its internal rate of return?
Should the project be accepted? Why or why not?
In capital budgeting, risk can be measured from three perspectives. What are those three
measures of a projects risk?
According to the CAPM, which measurement of a projects risk is relevant?
What complications does reality introduce into the CAPM view of risk, and what does that mean
or our view of the relevant measure of a projects risk?
Explain how simulation works. What is the value in using a simulation approach?
What is sensitivity analysis and what is its purpose?
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