Chapter 11 Cash Flows and Other Topics in Capital Budgeting

7) The initial outlay includes the immediate cash outflow necessary to purchase the asset and put it in operating order.

8) If the increase in net working capital is recovered entirely at the end of the project then it may be ignored.

9) Cash flows associated with a project's termination generally include the salvage value of the project net of any taxes associated with the sale.

10) Increasing depreciation expense results in a decrease of the incremental after-tax free cash flow.

11) Increases in working capital needs should be included as part of the initial outlay of a project, but decreases in working capital for a project should not be considered because they are not guaranteed.

12) Any increase in interest payments caused by a project should be counted in the incremental cash flows.

13) Terminal cash flows are always positive because they result from the shutting down of a project with the sale of any assets with remaining value.

14) Proceeds from the issuance of new debt and principal payments upon maturity of debt used to finance a project should be included in the calculation of the project's after-tax cash flows.

15) Interest payments on debt are not included in a project's incremental cash flows, but are instead accounted for in the project's discount rate.

16) Depreciation is a non-cash deduction so it may be ignored in the calculation of a project's incremental after-tax cash flows.