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Capital Budgeting (4)

Capital Budgeting (4) - Capital Budgeting(CB CB is the...

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Capital Budgeting (CB) CB is the process of planning for company’s purchases of assets whose cash flows continue beyond one year. Man- agement engaged in CB analyzes the profitability of various investment projects (e.g., replacing an assembly line, building a new factory, installing a modernized computer system, etc.). The projects are often classified into these types: Independent Projects, Mutually Exclusive Projects, Contingent Projects. CB begins with computing the Net Inestment in a given project (or group of projects), NINV : NINV = OC + Δ NWC 0 - SO + taxes on SO, where: OC = Original Cost of the new project, including any shipping and installation, Δ NWC 0 = change in NWC at the time of installation (i.e., time zero), resulting from the new project, NWC = Net Working Capital, NWC = CA - CL (current assets minus current liabilities), SO = proceeds from the sale of the old asset (if the project is to replace an old asset), taxes on SO = taxes on the sale of old asset.
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