BUS 401 Principles of Finance

A. The company needs to focus on the free cash flows instead of the accounting profits since these are the funds flow the company will receive and will be able to reinvest. By examining the cash flows they will be adapt to predict the profits and/or expenses timetable. The company’s interests in these cash flows are on an after-tax basis since they are part of the shareholders dividends. Additionally, the additional cash flows are of important, because, after analyzing the project while viewing the company as a whole, the additional cash flows are seen as minimal benefits and will show the elevated value to the company if the decision is made to implement the project. B. Since depreciation is not considered a cash flow item, it does affect the balance of the differential cash flows during the course of the project's run cycle due to the amount of taxes to be paid by the company. Depreciation is in fact an expense item. If the company records more depreciation has incurred, the more they will have in expenses. Hence, the profits will be lower and so will the taxes paid out which are cash flow items. C. While assessing the possible budgeting proposal, any unrecoverable costs are disregarded. The company needs place more interest in the cumulative after-tax cash flows by viewing the company has as a whole. Even if the company decide to investment the sunk costs will have already appeared, which means they are not additional cash flows and are not relevant.

D. The projects Initial Cash Outlay can be calculated by using: Initial Cash Outlay = Cost of New Plant & Equipment + Shipping & Installation Costs + Increase in Working Capital Initial Cash Outlay = $7,900,000 + $100,000 + $100,000 Initial Cash Outlay = $8,100,000 E. The differential cash flows over the project’s life would be $5,956,000,