Lecture 8- Capital Budgeting Part 1

Lecture 8- Capital Budgeting Part 1 - Straight Line...

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Straight Line Depreciation vs. the UCC / CCA Depreciation System X Co. has just bought a new bottling machine for $100,000. Management estimates that the useful economic life of the machine is 4 years and that it will have a salvage value of $20,000. If management uses straight line depreciation, what is the depreciation expense?
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UCC / CCA UCC = Undepreciated Capital Cost CCA = Capital Cost Allowance What is the depreciation expense for each of the next 4 years if the CCA rate is 20%? Year UCC (beg of period) CCA UCC (end of period) 1 $80,000 2 3 4
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UCC / CCA What if the half-year rule is in effect? Year UCC (beg of period) CCA UCC (end of period) 1 $40,000 2 3 4
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Capital Budgeting Process: Generate project ideas for long-term investments Estimate the cash flow from assets for the project for each year of the project Calculate an appropriate discount rate based on the risk of the projects future cash flows Calculate the NPV of the project Perform sensitivity analysis, scenario analysis etc. Implement investment decision and monitor results / progress of project.
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Guidelines for Cash Flows; Consider only incremental cash flows After tax cash flows only Don’t include sunk costs. Do include opportunity costs Take into account side effects (e.g. cannibalism) Ignore financing charges (Remember: Cash flow from assets does not include interest expense since it is a cash flow to creditors) Don’t forget any additional NWC + any recapture of NWC at the end of the project. Don’t forget capital cost and salvage value of the project.
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This note was uploaded on 03/15/2010 for the course BUSINESS MGT200 taught by Professor Manjuris during the Spring '08 term at Ryerson.

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Lecture 8- Capital Budgeting Part 1 - Straight Line...

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