Class 10&11&12&13 - Part 2

Class 10&11&12&13 - Part 2 -...

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Capital Budgeting Making Capital Investment Decisions
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What do we need to be able to  make capital budgeting  decisions? Ø BUSI408 Ø Estimate of future cash flows Ø Should consider relevant cash-flows only Ø Estimate of the required rate of return on  the investment, which should take into  account the riskiness of the project
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Which cash flows? Ø The cash flows that should be included in a  capital budgeting analysis are those that  will only occur (or not occur) if the project  is accepted § These cash flows are called  incremental cash  flows Ø The  stand-alone principle  allows us to  analyze each project in isolation from the  firm simply by focusing on incremental  cash flows
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Asking the right question Ø You should always ask yourself “Will this cash  flow occur ONLY if we accept the project?” § If the answer is “yes”, it should be included in the  analysis because it is incremental § If the answer is “no”, it should not be included in the  analysis because it will occur anyway § If the answer is “part of it”, then we should include  the part that occurs because of the project
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Class 10&11&12&13 - Part 2 -...

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