0321286618_08 - Part 3 Long-Term Investment Decisions...

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Unformatted text preview: Part 3 Long-Term Investment Decisions Chapters in this Part Chapter 8 Capital Budgeting Cash Flows Chapter 9 Capital Budgeting Techniques Chapter 10 Risk and Refinements in Capital Budgeting Integrative Case 3: Lasting Impressions Company Chapter 8 Capital Budgeting Cash Flows Instructor’s Resources Overview This chapter prepares the student for the techniques of capital budgeting presented in the next chapter (Chapter 9). The steps in the capital budgeting process are described, beginning with proposal generation and ending with follow-up, and the associated terminology is defined. The special concerns involved in international capital budgeting projects are discussed next. The chapter concludes with the basics of determining relevant after-tax cash flows of a project, from the initial cash outlay to annual cash stream of costs and benefits and terminal cash flow. It also describes the special concerns facing capital budgeting for the multinational company. Study Guide The following Study Guide example is suggested for classroom presentation: Example Topic 2 Expansion-type cash flows Suggested Answer to Chapter Opening Critical Thinking Question Where might financial managers find the type of information they need to evaluate the cost- effectiveness of a new project? Depending upon the scope of a project, financial managers may need to draw information from many areas of a corporation including research and development, marketing, operations, human resources and within the various departments dealing with corporate finance. It may be possible to get some of the information directly from the project managers if they have done some of the legwork already. 194 Part 3 Long-Term Investment Decisions Answers to Review Questions 1. Capital budgeting is the process used to evaluate and select long-term investments consistent with the goal of owner wealth maximization. Capital expenditures are outlays made by the firm that are expected to produce benefits over the long term (a period greater than one year). Not all capital expenditures are made for fixed assets. An expenditure made for an advertising campaign may have long-term benefits. 2. The primary motives for making capital expenditures include: • Expansion —increasing the productive capacity of the firm, usually through the acquisition of fixed assets. • Replacement —replacing existing assets with new or more advanced assets which provide the same function. • Renewal —rebuilding or overhauling existing assets to improve efficiency. Other motives include expenditures for non-tangible projects that improve a firm’s profitability, such as advertising, research and development, and product development. A firm may also be required by law to undertake pollution control and similar projects....
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0321286618_08 - Part 3 Long-Term Investment Decisions...

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