Lecture_cap_budget_April_19_2007

Lecture_cap_budget_April_19_2007 - ORIE 350 April 19, 2007...

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ORIE 350 April 19, 2007 Capital Budgeting
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Incremental Analysis The general idea of incremental analysis is simply to find the change in operating income that would occur if a certain new course of action were followed. Usually some assumptions are necessary in the analysis. And, the behavior of costs that would occur under the new course of action is important.
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Fixed Costs Sometimes fixed costs can easily be eliminated. For example, a leased asset that can be returned without penalty, or subleased for full value. Other times, fixed costs persist under the new course of action. For example, factory building rent.
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Long Term Asset Liquidation Sometimes we can easily liquidate (sell) long term assets and get cash. For example, it is usually easy to sell vehicles. Then, the generated cash, thus freed up, can be invested, where it actually earns a return (at the minimum ROI of the division)!
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Variable Costs We usually find that variable costs are more or less truly variable, that is, when production is zero, the variable cost is zero. There are exceptions, for example, if you signed a contract promising to buy a certain minimum number of some component.
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Employees Sometimes we can vary the number of employees on a project (or get rid of all of them) at zero cost. Sometimes, changing the workforce is expensive or impossible. France is famous for making it almost impossible to fire (sack) workers.
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Rachel Legrain-Trapani Miss France, 2007 Chateau Latour 1990 $875.00 French workers
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Make or Buy Deciding whether or not to make or buy something should deal with all costs. What happens to the fixed overhead? Will it vanish, or will it need to be applied to other products or departments? Also, the liquidation of fixed assets can take time.
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Capital Budgeting The process of making capital expenditure decisions is known as capital budgeting. We’ll modify the textbook presentation slightly. We will focus only on
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This note was uploaded on 04/05/2009 for the course ORIE 350 taught by Professor Callister during the Summer '08 term at Cornell University (Engineering School).

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Lecture_cap_budget_April_19_2007 - ORIE 350 April 19, 2007...

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