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# L_14 - Lecture Outline Lecture 14 Project Analysis and...

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Lecture Outline Lecture 14 Project Analysis and Evaluation Lecture Organization Cost Structure Break-Even Analysis

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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
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 the forecasting risk of the project (eg: using scenario analysis) the project’s cost structure

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Cost Analysis Why Cost Analysis of the Project is Important? Total Costs of production depend upon the quantity (the volume) of sales or production. The quantity of product sold is one of the decision variables that managers have some control over.
Cost Analysis Fixed and Variable Costs Variable costs ( VC ) —costs that change as the volume of sales changes (direct labor and materials, for example). variable costs = quantity × cost per unit = VC = Q × v Variable Cost v are also called the marginal cost Fixed costs ( FC ) —costs that are constant over a period regardless of the level of sales. Total costs, ( TC ) —sum of fixed costs (FC) and variable costs TC = FC + VC = FC + (Q × v) Average cost (AC) is total cost divided by output: AC = TC/Q = (FC + VC)/Q

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Average cost versus marginal cost Example:
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