Incremental Cash Flow and Time Value of Money
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Part A: Describe the concept of incremental cash flow. Why is this important to distinguish from other cash flows?
Part B: How can TVM be used when deciding to lease an asset instead vs.buying? Explain.
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Incremental cash flow and time value of money are investigated and described in the solution.
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Part A: Describe the concept of incremental cash flow. Why is this important to distinguish from other cash flows?
The incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets. This is important to distinguish from other cash flows in order to ascertain the economic viability of the project.
Part B: How can TVM be used when deciding to lease an asset instead vs.buying? Explain.
Leases are contractual arrangements by which the owner of property (the "lessor") allows another person (the "lessee") to use the property for a stated period of time in exchange for cash payments or other compensation. In business, the two main types of equipment leases you would typically encounter are:
True leases - If the lessee acquires no rights to the property other than its use, then the lease is commonly referred to as a "true" (or "straight") lease. Under a true lease, the lessor is treated as the owner of the leased property for both tax ...
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