Cash Flow Estimation and Risk Analysis

Please review the mini case “Shrieves Casting Company” given in under chapter 11 on page 493 and answer the following questions:

1. Define “incremental cash flow.” 

  • Should you subtract interest expense or dividends when calculating project cash flow? 
  • Suppose the firm spent $100,000 last year to rehabilitate the production line site. Should this be included in the analysis? Explain. 
  • Now assume the plant space could be leased out to another firm at $25,000 per year. Should this be included in the analysis? If so, how? 
  • Finally, assume that the new product line is expected to decrease sales of the firm’s other lines by $50,000 per year. Should this be considered in the analysis? If so, how? 

2. What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and, when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates? 

3. What are the three types of risk that are relevant in capital budgeting? How is each of these risk types measured, and how do they relate to one another? How is each type of risk used in the capital budgeting process? 

Requirements: Your response to each of the three questions above should be between 250-to-300-words and include at least 3 reputable sources. The content taken from textbook or any other source should be paraphrased (written in own words). Each response should be written in complete sentences with attention paid to good grammar and spelling. Please double-space, use 12-point font, with one inch margins. Be sure to cite your resources and use APA format for the entire assignment. Remember to reference all work cited or quoted by the text authors.

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