Relevant Cash Flows

Question 1

When can cash inflows and outflows be included?

Answer 1

In only future, incremental cash flows

Question 2

What are incremental cash flows?

Answer 2

Change because a project is undertake

Question 3

An example of incremental cash flows?

Answer 3

Cash from sales - operating costs (materials and labours)

Question 4

Why are financing cash flows not included?

Answer 4

As the cost of finance is measured in the cost of capital/discount rate

Question 5

What costs are excluded from cash flows?

Answer 5

Sunk costs
Non-cash costs
Book values
Unavoidable costs
FInance costs

Question 6

Example of sunk costs?

Answer 6

Money already spent

Question 7

Example of non-cash costs?

Answer 7

Depreciation

Question 8

Example of book values?

Answer 8

FIFO/LIFO

Question 9

Example of unavoidable costs?

Answer 9

Money already committed and apportioned fixed costs

Question 10

Example of finance costs?

Answer 10

Interest

Question 11

What is lost contribution?

Answer 11

An opportunity cost and should be shown as a cash outflow

Question 12

What is included?

Answer 12

All opportunity costs and revenues

Question 13

Costs to date and what has just been purchased?

Answer 13

Not included as sunk

Question 14

Sales value of a project?

Answer 14

Included

Question 15

Negative effect on tax system for cash flows?

Answer 15

It is charged on operating results

Question 16

Positive effect on tax system for cash flows?

Answer 16

Tax relief is given on non-current assets via tax-allowable depreciation (TAD).

Question 17

What is the operating results?

Answer 17

Revenues less operating costs (materials, labour and overheads)

Question 18

What happens with tax relief on finance costs?

Answer 18

Taken into account in the discount rate

Question 19

What is financial accounting depreciation?

Answer 19

It is not a tax-allowable expense.

Instead business may claim tax-allowable depreciation

Question 20

What is the difference between tax written-down value and disposal proceeds

Answer 20

Tax allowable loss or taxable gain

Question 21

What are all negative cash flows associated with a project?

Answer 21

They are assumed to attract tax relief

Question 22

Revenue expenditure and tax?

Answer 22

Reduces taxable profit

Question 23

Capital expenditure and tax?

Answer 23

Attracts tax-allowable depreciation

Question 24

What is the sufficient taxable profits assumption?

Answer 24

If the net cash flow for a year is negative. there will be a positive tax cash flow in respect of the tax relief

Question 25

Tax discount project appraisal?

Answer 25

Forecast the post-tax cash flows from the project AND discount at the stated discount rate

Question 26

When are a company’s investors only entitled to a project’s cash flow?

Answer 26

After corporation tax has been paid

Question 27

How to calculate pre-tax cash flow?

Answer 27

Post-tax cash flow/(1 − Corporate tax rate)

Question 28

How to calculate pre-tax discount rate?

Answer 28

Post-tax discount rate/(1 − Corporate tax rate)

Question 29

Why does pre-tax cash flow rarely equal post-tax cash flow?

Answer 29

Significant timing differences between cash flows and taxable profits