Wal-Mart: Cash Flow Estimate

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Let us assume that The New York Times is a potential acquisition target for Wal-Mart. As far as cost when estimating the cash flow that might be emanating from the initial investment and problems in getting it funded is the accurate calculation of the incremental cash flows. Incremental cash flows are only cash flows that are incremental and that result from a project. However, few subjects are worth considering to avoid pitfalls in estimating the costs are the consideration of sunk costs, opportunity costs, side effects, net working capital, financial costs, and other issues.

Sunk cost is a cost we have already paid or have already incurred the liability to pay (Ross, Westerfield, & Jordan, 2008). Such a cost cannot be changed by the decision today to accept or reject a project. That is, the firm will have to pay this cost no matter what. In other words, sunk cost is clearly not relevant to the decision at hand. Therefore, sunk costs must be excluded in an analysis of estimating the cash flow and initial investment.

Opportunity cost is slightly different; it requires us to give up a benefit (Ross, Westerfield, & Jordan, 2008). A common situation arises in which a firm already owns some of the assets a proposed project will be using. For example, Wal-Mart might be thinking of converting an old printing machine they bought years ago for $100,000 into upmarket printing of the New York Times. If Wal-Mart undertakes this project, there will be no direct cash outflow associated with buying the old machine because they already own it. However, the machine should not be treated as free when evaluating the project. This is because the machine is a valuable resource used by the project. If Wal-Mart didn't use it here, they could do something else with it, like selling it. Therefore, using the machine for printing the New York Times thus has an opportunity cost. That is, Wal-Mart gives up the valuable opportunity to do something else with ...