BIS3589_ch11 - Chapter11 CapitalBudgeting CapitalBudgeting

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Chapter 11 Capital Budgeting
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Capital Budgeting   Capital Budgeting: the process of determining how a firm  should  allocate its capital resources  to profitable  long- term investment  opportunities in order to  maximize  shareholder’s wealth
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Cash Flow characteristics 1. Incremental (Differentiate): the CFs must be in addition to those  that the firm already has. 2. After-tax: the CFs must be that of after-tax payment as before-tax  income can’t be spent by shareholders. 3. Sunk costs: the CFs that will not be included as they cannot be  recovered 4. Financing costs:  the CFs that will not be included as they are  already implicitly incorporated in the discount rate (k)
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Components in capital budgeting Initial Outlay (IO):  Net cost of acquiring the proposed  project Annual after-tax cash flow (ATCF): Annually cash flow  from implementing projects  Terminal Cash Flow (TCF): Cash flow from net proceed  of investment and other benefits
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Initial Outlay 1. New project acquiring:  • price of the proposed project • shipping expenses • project installation • etc. (any other costs needed to run up the project) 2. After-tax Proceeds from sale of current project
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This note was uploaded on 01/11/2012 for the course FINANCE fin 3701 taught by Professor Tengihla during the Spring '11 term at Assumption College.

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BIS3589_ch11 - Chapter11 CapitalBudgeting CapitalBudgeting

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