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ch8 - CHAPTER 8 CAPITAL BUDGETING CASH FLOWS LEARNING LG1...

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L E A R N I N G G O A L S 354 C APITAL B UDGETING C ASH F LOWS C H A P T E R Across the Disciplines WHY THIS CHAPTER MATTERS TO YOU Accounting: You need to understand capital budgeting cash flows in order to provide revenue, cost, depreciation, and tax data for use both in monitoring existing projects and in develop- ing cash flows for proposed projects. Information systems: You need to understand capital budget- ing cash flows in order to maintain and facilitate the retrieval of cash flow data for both completed and existing projects. Management: You need to understand capital budgeting cash flows so that you will understand what cash flows are relevant in making decisions about proposals for acquiring additional production facilities, for new products, and for the expansion of existing product lines. Marketing: You need to understand capital budgeting cash flows so that you can make revenue estimates for proposals for new marketing programs, for new products, and for the expan- sion of existing product lines. Operations: You need to understand capital budgeting cash flows so that you can make cost estimates for proposals for the acquisition of new equipment and production facilities. Calculate the initial investment associated with a proposed capital expenditure. Determine relevant operating cash inflows using the income statement format. Find the terminal cash flow. LG6 LG5 LG4 8 Understand the key motives for capital expendi- ture and the steps in the capital budgeting process. Define basic capital budgeting terminology. Discuss the major components of relevant cash flows, expansion versus replacement cash flows, sunk costs and opportunity costs, and international capital budgeting and long-term investments. LG3 LG2 LG1
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355 I t should come as no surprise that Intel, the world’s largest chip maker and technology pioneer, is also a leader in e- business. Chairman Andy Grove decided in 1998 that Intel would transform itself into a “100 percent e-corporation.” Since then, each of the company’s new business applications has been based on the Internet or on e-commerce. Leading the Internet initiative was CFO Andy Bryant, whose responsibilities were expanded to include enterprise services. Bryant was an unlikely choice to lead the company’s transformation, because he was skep- tical about the value of e-commerce. He quickly changed his tune when he learned that Intel receives over one-quarter of its orders after hours. The flexibility of online ordering added value for customers. Intel has launched more than 300 e-business projects since 1998. In 2001, the com- pany generated 90 percent of its revenue—$31.4 billion—from e-commerce transactions. Ironically, Bryant’s skepticism about e-commerce turned out to be a good thing. He devel- oped methods to analyze e-business proposals to make sure they added value to the company, applying rigorous financial discipline and monitoring returns on investment. “Every project has an ROI,” Bryant says. “It isn’t always positive, but you still have to measure what you put in and what
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