Question

When determining incremental unlevered net income, should all the expenses listed be included? If not, what expenses should we exclude and why?

Initial Capital Expenditure

Useful Life of Equipment

Annual Depreciation

Sales in Year 1

Sales Growth through Year 6

Sales Growth Year 6 Onward

Free Cash Flow Year 6 Onward

Cost of Goods Sold (% of sales)

Incremental SG&A Expense                 25% of the Incremental SG&A Expense is an overhead expense that will be incurred even if                  the project is not accepted.

Market Research Expense                  This research was completed last month to be paid by the end of next year

Initial Net Working Capital

Accounts Receivable % of Next Year Sales

Inventory % of Next Year COGS

Accounts Payable % of Next Year COGS

Interest Expense

Average Tax Rate

Cost of Capital

Marginal Tax Rate

Answer 1

Answer ) The concept of incremental earnings comprise all amount for which the ongoing project is supposed to change the organization's earnings. Incremental cash flow should based on all the incremental cost and income linked with the particular project, and opportunity costs, but shouldn't include sunk costs and any type of interest expenses in case of unlevered.

Types of cash flow	Included (yes/no)	Remark in case of NO
Initial Capital Expenditure	YES
Useful Life of Equipment	YES
Annual Depreciation	YES
Sales in Year 1	YES
Sales Growth through Year 6	YES
Sales Growth Year 6 Onward	YES	as project life is more than 6 years
Free Cash Flow Year 6 Onward	YES
Cost of Goods Sold (% of sales)	YES
Incremental SG&A Expense	YES
25% of the Incremental SG&A Expense is an overhead expense that will be incurred even if                  the project is not accepted.	yes
Market Research Expense	YES
This research was completed last month to be paid by the end of next year	NO	SUNK cost
Initial Net Working Capital	YES
Accounts Receivable % of Next Year Sales	NO	Already calculated in COGS
Inventory % of Next Year COGS	NO	Already calculated in COGS
Accounts Payable % of Next Year COGS	NO	Already calculated in COGS
Interest Expense	NO	As project is unlevered
Average Tax Rate	YES
Cost of Capital	YES
Marginal Tax Rate	YES