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
Initial Investment Installed cost of new asset
Cost of new asset
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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