Topic 4_student - Topic 4 Capital Budgeting Readings: Chap...

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Topic 4 Capital Budgeting Readings: Chap 2 & Chap 7 (7.1-7.4)
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Capital Budgeting What’re the two types of decisions that managers have to make? Separate capital budgeting decisions (investment decisions) from financing decisions. 1 2 0 1 2 ... (1 ) (1 ) (1 ) t t CF CF CF NPV CF r r r = + + + + + + +
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Incremental cash flows We learned how to calculate NPV using incremental cash flows. Discount incremental cash flows (i.e.relevant cash flows, free cash flows) How do we figure out incremental cash flows? 1 2 0 1 2 ... (1 ) (1 ) (1 ) t t CF CF CF NPV CF r r r = + + + + + + +
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What should be included in incremental cash flows? Incremental cash flows are any and all changes in cash flows caused by undertaking an investment. Will a cash flow (cost or revenue) still exist without the project (if the project is not undertaken)? (Ask the with VS without question)
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Is it an incremental cash flow? Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. The land and existing buildings can be sold for $5 millions.
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Is it an incremental cash flow? Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. Costs of demolition and clearing land.
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Is it an incremental cash flow? Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. Lost earnings from other products due to managers' time spent on the new plant.
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Is it an incremental cash flow? Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. Cost of new access road put in last year.
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Is it an incremental cash flow? Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. Future depreciation of the new plant.
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Suppose that you are deciding whether to invest in a new manufacturing factory. You own the land and buildings that will be used, but existing buildings must be demolished. Initial investment on inventories and raw
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Topic 4_student - Topic 4 Capital Budgeting Readings: Chap...

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