L_15 - Lecture Outline Lecture 15 Project Analysis and...

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Lecture Outline Lecture 15 Project Analysis and Evaluation Lecture Organization Operating Leverage Additional Considerations in Capital Budgeting
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Capital Budgeting Questions Projected versus Actual Cash Flows Estimated cash flows are expectations or averages of possible cash flows, not exact figures
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Capital Budgeting Questions Forecasting Risk Forecasting risk —the danger of making a bad (money losing) decision because of errors in projected cash flows. In order to develop reliable cash flow estimates for the projects we have to understand (among other things) how sensitive the cash flows to changes in quantity?
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Quantity Analysis How sensitive the cash flows to changes in quantity? The sensitivity of earnings changes to changes in quantity (volume) of sales is dependent upon the degree of operating leverage (DOL).
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OPERATING LEVERAGE Operating leverage - Degree to which a project or firm uses fixed costs in production. Plant and equipment (capital) and noncancellable rentals are typical fixed cost items. Operating leverage is the measure of capital intensity
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Example of Different DOL projects Example: comparison two alternative cost structures for project A and B; Project A: FC (Proj. A) =$10,000;
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This note was uploaded on 06/22/2011 for the course FINA 365 taught by Professor Koch during the Spring '08 term at South Carolina.

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L_15 - Lecture Outline Lecture 15 Project Analysis and...

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