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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
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.
- Fall '13