Chapter 7 notes

Chapter 7 notes - Chapter 7 discusses practical...

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Chapter 7 discusses practical applications of capital budgeting. Capital budgeting "involves planning and justifying how capital dollars are spent on long term projects" (FDM, Lasher, 2005). Such investments usually include plant, equipment, research & development, environmental compliance, and other projects that expand the capabilities of the company and contribute to its ability to generate future earnings. Most of them are the ‘growth opportunities’ we discussed in Chapter 5. Environmental compliance projects are tricky. In most cases, companies are lucky to break-even (NPV=0). It’s important to understand that capital budgeting must be placed on an incremental basis. This means that sunk costs (ones that have already occurred) must be ignored, whereas both opportunity costs (cost of making one choice over another) and side effects, such as erosion (taking away from the value of other activities) or synergy (leveraging or increasing the value of existing activities by taking on a new) must be considered. Moreover,
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This note was uploaded on 02/14/2011 for the course FINANCE 610 taught by Professor Siad during the Spring '09 term at UMBC.

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