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ch11-lect - Chapter 11 Capital Budgeting Introduction...

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Chapter 11 Capital Budgeting Introduction 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 and other projects that expand the capabilities of the company and contribute to its ability to generate future earnings. Capital Budgeting Principles Previously we discussed risk and return we learned quite simply that when investors were making decisions about where to place their investment money, they made decisions in terms of opportunity cost. They think, "I have to earn 15.0% if I invest in this business X, or I might as well leave the money in my money in business Y." The same risk-return trade-offs occur in capital budgeting decisions within companies as managers decide how to allocate capital dollars (usually constrained or limited) among various projects, which are just like investments. Projects are just like investments because the money that the company invests in the project has an opportunity cost. That money could be sitting in the company's bank or investment accounts earning interest or it could be invested in some other project that might be more successful for the company. Additionally, a company may have to
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