Lecture 20 0419 - ORIE 350 Capital Budgeting Incremental...

Info icon This preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
ORIE 350 April 19, 2007 Capital Budgeting
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 2
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.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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)!
Image of page 4
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.
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 6
France, Good & Bad Rachel Legrain-Trapani Miss France, 2007 Chateau Latour 1990 $875.00 French workers
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 8
Capital Budgeting The process of making capital expenditure decisions is known as capital budgeting.
Image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern