Capital Budgeting_Investment decision

Capital Budgeting_Investment decision - Relevant Cash Flows...

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1 Capital Budgeting: Investment Decision P’ O Tuitional BBA Business Finance Relevant Cash Flows 1. Capital budgeting decision must be based on cash flow, not accounting income. 2. Only “Incremental cash flows are relevant to the accept/reject decision. Recall, Net cash flow = Net income + Depreciation = Return on Cap + Return of Cap Incremental Cash Flows • Occur only if the project is accepted. • Four special problems in determining incremental CFs: • 1. Sunk costs : Ex • 2. Opportunity costs • 3. Externalities - Cannibalization : when a new project takes sales from existing product. • 4. Shipping and Installation costs Changes in Net Working Capital (NWC) • The increased current assets resulting from a new project, minus the spontaneous increase in accounts payable and accruals. •EX - Increase in Inventories. - Increase in accounts receivable . As the project approaches termination, inventories will be sold off and not replaced, and receivables will be collected. As these changes occur, the firm will receive an end-of-project CF that is equal to the NWC.
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2 Evaluating Capital Budgeting Projects • In general, the incremental cash flow from a typical project can be classified as follow: 1. Initial investment outlay:
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Capital Budgeting_Investment decision - Relevant Cash Flows...

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