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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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