Finance Final Exam - Finance Final Exam Chapter 12(Highest...

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Finance Final Exam Chapter 12(Highest) Capital Budgeting the process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. Capital Budgeting Involves : 1. Generating investment project proposals consistent with the firm’s strategic objectives 2. Estimating after-tax incremental operating cash flows for investment projects 3. Evaluating project incremental cash flows 4. Selecting projects based on a value-maximizing acceptance criterion 5. Reevaluating implemented investment projects continually and performing post audits for completed projects. Capital Budgeting is influenced by accelerated depreciation, salvage value, and tax rate changes. In proper capital budgeting analysis we evaluate incremental cash-flow. One of the most important task in capital budgeting is estimating future cash flows for a project. For each investment proposal we need to provide information on operating, as opposed to financing, cash flows. Also, the information should be presented on an incremental basis. Cash flows are determined on an after-tax basis. The economy should operate where MR=MC. In Finance you should accept projects where IRR= MCC. Sunk Cost unrecoverable past outlays that, since they cannot be recovered, should not affect present actions or future decisions. Sunk Costs are not included when estimating “after -tax incremental operating cash flows. Opportunity Cost what is lost by not taking the next-best investment alternative. These should be treated as if they were cash flow. In estimating cash flows, anticipated inflation must be taken into account! Depreciation represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both. A non-cash expense. Depreciation reduces taxable income. MACRS (Modified Accelerated Cost Recovery System) the current method of accelerated asset depreciation. Profitable firms prefer this method. This method cannot be used for equipment that lies outside the US. An asset in a 5 year property class depreciates over 6 years. Everything else equal, the greater the depreciation charges, the lower the taxes paid by the firm. Depreciable Basis in tax accounting the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes. 1. Depreciable Basis =Cost of Asset + Capitalized Expenditures. Under US law an assets depreciable basis is not reduced by its estimated salvage value. Recapture of Depreciation any amount realized in excess of book value but less than the asset's depreciable basis. Capital Expenditures
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This note was uploaded on 03/21/2012 for the course ECON 102 taught by Professor Rossana during the Spring '08 term at University of Michigan.

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Finance Final Exam - Finance Final Exam Chapter 12(Highest...

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