Fundamentals of Corporate Finance, Second Edition

11

Cash Flows and Capital Budgeting

David Woo/©Corbis

Learning Objectives

Explain why incremental after-tax free cash flows are relevant in evaluating a project and calculate them for a project.

Discuss the five general rules for incremental after-tax free cash flow calculations and explain why cash flows stated in nominal (real) dollars should be discounted using a nominal (real) discount rate.

Describe how distinguishing between variable and fixed costs can be useful in forecasting operating expenses.

Explain the concept of equivalent annual cost and use it to compare projects with unequal lives, decide when to replace an existing asset, and calculate the opportunity cost of using an existing asset.

Determine the appropriate time to harvest an asset.

On September 27, 2010, Southwest Airlines announced that it had agreed to purchase its smaller rival AirTran Airways for $1.4 billion ...