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What Was Done Improperly in Hawthorne Study by Today's Research

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Ch 9 Test – Discounted Cash Flow Analysis
• Capital budgeting uses cash flows not accounting profits.
• To calculate the value of a capital budgeting project, use incremental cash flows, not total cash flows.
• Know what items are considered in cash flow analysis for capital budgeting: ▪ incremental cash flows, ▪ indirect effects, ▪ opportunity costs, ▪ changes in net working capital, ▪ shutdown cash flows,) ▪ beaware of overhead costs. Forget sunk costs.
• Know when sunk costs are considered in capital budgeting cash flows (never).
• Know importance of using real interest rate to discount real cash flows and nominal interest rate to discount nominal cash flows i.e. Do not mix them together. Know that either method will result in same NPV. (No calculation of real interest rate on test.)
• Be able to calculate cash flows from operations.
A new project will generate sales of $74 million, cost of $42 million and depreciation of $10 million in the coming year. The firm’s tax rate is 35%. Calculate cash flow for the next year.
(Revenue – Cash Expense) x (1-tax rate) + (depreciation x tax rate) {calculator}
(74 – 42) x (1 – 0.35) + (10 x 0.35) = $24.3
• Be able to calculate change in net working capital (problem 8 is good example).
A house painting business had revenues of $16000 and expenses of $9000. There were no depreciation expenses. However, the business reported the following changes in working capital Beg End
A/R 1200 4500
A/P 700 300

Change in working capital = (accounts receivable – (accounts payable

= ($4,500 – $1,200) – ($300 – $700) = $3,700

Cash flow = $16,000 – $9,000 – $3,700 = $3,300

• Know how depreciation tax shield is calculated (depreciation x tax rate = tax shield or tax “savings”) {calculator}.
• When evaluating

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