These relationships are shown in figure 84 actually

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Unformatted text preview: pon termination of the new and the old assets. These relationships are shown in Figure 8.4. Actually, all capital budgeting decisions can be viewed as replacement decisions. Expansion decisions are merely replacement decisions in which all cash flows from the old asset are zero. In light of this fact, this chapter focuses primarily on replacement decisions. Sunk Costs and Opportunity Costs sunk costs Cash outlays that have already been made (past outlays) and therefore have no effect on the cash flows relevant to a current decision. opportunity costs Cash flows that could be realized from the best alternative use of an owned asset. EXAMPLE When estimating the relevant cash flows associated with a proposed capital expenditure, the firm must recognize any sunk costs and opportunity costs. These costs are easy to mishandle or ignore, particularly when determining a project’s incremental cash flows. Sunk costs are cash outlays that have already been made (past outlays) and therefore have no effect on the...
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This document was uploaded on 01/19/2014.

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