What effect do sunk costs and opportunity costs have

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Unformatted text preview: st for a given project? How can expansion decisions be treated as replacement decisions? Explain. What effect do sunk costs and opportunity costs have on a project’s incremental cash flows? How can currency risk and political risk be minimized when one is making foreign direct investment? 8.3 Finding the Initial Investment The term initial investment as used here refers to the relevant cash outflows to be considered when evaluating a prospective capital expenditure. Because our discussion of capital budgeting is concerned only with investments that exhibit conventional cash flows, the initial investment occurs at time zero—the time at which the expenditure is made. The initial investment is calculated by subtracting all cash inflows occurring at time zero from all cash outflows occurring at time zero. The basic format for determining the initial investment is given in Table 8.2. The cash flows that must be considered when determining the initial investment CHAPTER 8 TABLE 8.2 Capital Budgeting Cash Flows 365 The Basic Format for Determining Initial Investment Installed cost of new asset Cost of new asset Installation costs After-tax proceeds from sale of old asset Proceeds from sale of old asset Tax on sale of old asset Change in net working...
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