Chap12_2009 - Chapter 12 Capital Budgeting and Estimating...

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Chapter 12 Capital Budgeting and Estimating Cash Flows
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Learning Objectives After studying Chapter 12, you should be able to: Define “capital budgeting” and identify the steps involved in the capital budgeting process. Explain the procedure to generate long-term project proposals within the firm. Justify why cash, not income, flows are the most relevant to capital budgeting decisions. Summarize in a “checklist” the major concerns to keep in mind as one prepares to determine relevant capital budgeting cash flows. Define the terms “sunk cost” and “opportunity cost” and explain why sunk costs must be ignored, while opportunity costs must be included, in capital budgeting analysis. Explain how tax considerations, as well as depreciation for tax purposes, affects capital budgeting cash flows. Determine initial, interim, and terminal period “after-tax, incremental, operating cash flows” associated with a capital investment project.
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• The Capital Budgeting Process • Generating Investment Project Proposals • Estimating Project “After-Tax Incremental Operating Cash Flows” Topics
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What is Capital Budgeting? The process of identifying , analyzing , and selecting investment projects whose returns (cash flows) are expected to extend beyond one year.
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The Capital Budgeting Process • Generate investment proposals consistent with the firm’s strategic objectives. • Estimate after-tax incremental operating cash flows for the investment projects. • Evaluate project incremental cash flows. • Select projects based on a value-maximizing acceptance criterion. • Reevaluate implemented investment projects continually and perform post-audits for completed projects.
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Classification of Investment Project Proposals 1. New products or expansion of existing products 2. Replacement of existing equipment or buildings 3. Research and development 4. Exploration 5. Other (e.g., safety or pollution related)
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Screening Proposals and Decision Making 1. Section Chiefs 2. Plant Managers 3. VP for Operations 4. Capital Expenditures Committee 5. President 6. Board of Directors Advancement to the next level depends on cost and strategic importance.
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Estimating After-Tax Incremental Cash Flows Cash (not accounting income) flows Operating (not financing) flows After-tax flows Incremental flows Basic characteristics of relevant project flows
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This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

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Chap12_2009 - Chapter 12 Capital Budgeting and Estimating...

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