Beruflich Dokumente
Kultur Dokumente
Learning Goals
1. Understand the motives for key capital budgeting expenditures and the steps in the capital budgeting process. 2. Define basic capital budgeting terminology. 3. Discuss relevant cash flows, expansion versus replacement decisions, sunk costs and opportunity costs, and international capital budgeting.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
8-2
8-3
8-4
8-5
1. Proposal Generation
2. Review and Analysis
Our Focus is on Step 2 and 3
8-6
8-7
Basic Terminology: Unlimited Funds versus Capital Rationing If the firm has unlimited funds for making investments, then all independent projects that provide returns greater than some specified level can be accepted and implemented. However, in most cases firms face capital rationing restrictions since they only have a given amount of funds to invest in potential investment projects at any given time.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
8-8
Basic Terminology: Accept-Reject versus Ranking Approaches The accept-reject approach involves the evaluation of capital expenditure proposals to determine whether they meet the firms minimum acceptance criteria. The ranking approach involves the ranking of capital expenditures on the basis of some predetermined measure, such as the rate of return.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
8-9
8-10
8-11
8-12
8-13
Relevant Cash Flows: Expansion Versus Replacement Decisions Estimating incremental cash flows is relatively straightforward in the case of expansion projects, but not so in the case of replacement projects. With replacement projects, incremental cash flows must be computed by subtracting existing project cash flows from those expected from the new project.
Copyright 2009 Pearson Prentice Hall. All rights reserved.
8-14
8-15
Relevant Cash Flows: Sunk Costs Versus Opportunity Costs Note that cash outlays already made (sunk costs) are irrelevant to the decision process. However, opportunity costs, which are cash flows that could be realized from the best alternative use of the asset, are relevant.
8-16
Despite these risks, the pace of foreign direct investment has accelerated significantly since the end of WWII.
8-17
8-18
8-19
Hudson Industries, a small electronics company, 2 years ago acquired a machine tool with an installed
8-20
8-21
8-22
Finding the Initial Investment (cont.) Sale of the Asset for Its Book Value
If Hudson sells the old asset for its book value of $48,000, there is no gain or loss and therefore no tax implications from the sale.
8-23
8-24
8-25
8-26
8-27
8-28
8-29
Table 8.5. Note that both the expected usable life of the
proposed machine and the remaining usable life of the existing machine are 5 years. The amount to be depreciated with the
8-30
8-31
Table 8.6 Depreciation Expense for Proposed and Present Machines for Powell Corporation
8-32
Table 8.7 Calculation of Operating Cash Inflows Using the Income Statement Format
8-33
Table 8.8 Calculation of Operating Cash Inflows for Powell Corporations Proposed and Present Machines
8-34
Table 8.9 Incremental (Relevant) Operating Cash Inflows for Powell Corporation
8-35
8-36
8-37
8-38
8-39