Corporate Financial Strategy - Essay Example

The money spent by the company and the level of the cash flow is considered as the profit depends on getting break even in the marketing and sales of the product. Ans. Sunk cost can be defined as the cost that has been already incurred. This cannot be relevant to the present decisions. The items related with the preliminary engineering should be eliminated from the present decisions. This gives a proper place for sunk cost to be recognised as a separate expense budget and not in the new product proposal.

This will make the sunk cost as a factor that will not effect investment decisions that give importance to cash flow more than the income flows. (Columbia .edu team, 2005) 1 Ans. In general the financial analysts have to use capital budgeting decisions in the course of their careers. After valuating the process, they have to answer a yes and no choice to their higher ups. In doing so, they have to consider future cash flows of the project. The cash flows are considered to be more important as they give more liquidity to the project and thus enable the quick returns.

This means that the cash flow analysis of the investment decisions concentrate on quick returns rather than heavy returns. This can be termed as the main reason for consideration of cash flow instead of income flow for taking a investment decision. (R. Bruner, 2007) 2 Ans. The incremented cash flows are considered more important than the total cash flows. This is because; the incremental cash flow determines the earnings after tax due to the sales. As the sales increases the earnings will increase.

The ratio between earnings before interest and after tax to the sales can give the increment in the cash flow. This increment can be considered as the indicator of the increase in the income that is proportionate to the sales. Though the income increases with the increase of sales the calculation of increment ratio will tell about the level of increase and whether that