Danforth and Donnely Case

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In the case of Danforth and Donnely, multiple questions are brought up concerning whether or not certain events count as cash flows. One such argument is whether or not the marketing costs of Blast should be considered as a cash flow. Another cash flow argument concerns the working capital required for Blast. The new product would also use excess production facilities and building space and could conceivably incur cash flows. Erosion from sales of current laundry products is also argued as being a possible cash flow.

Finally, the question of debt, as funding for the project, is questioned of being a cash flow. The question of cash-flow-or-not for each of these dilemmas can be answered by looking at some of the the principles of corporate Finance. The marketing cost was an expense. However, the project has not yet been implemented So, at this point in time, it is a sunk cost. Therefore, it is irrelevant to the project’s continuation and should not be considered a cash flow. A net investment of $200,000 is required as additional working capital.

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This money would be considered a part of the initial outlay, which is money used to start up the project. Even though the money wouldn’t leave the company, it would be a cash flow. It would happen during the life of the project and the project could not happen without it. The product should not be charged with the usage of production facilities and building. The overhead costs of these things would happen regardless of the product’s existence. Therefore, it should not be considered as a cash flow. Sales stolen from existing products do not count as cash flows.

The money diverted from the old products is not new money. Money diverted from competitors’ products would be considered a cash inflow, but this is not the case. A chance of a competitor introducing a similar product still would not have any effect. Interest payments from funds used to finance the product would not be considered cash flows. The cost of financed money should not be accounted for because future cash flows get discounted to present value. Tis is all the recognition needed. Deducting interest payments would be accounting for the same expense twice.

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