Chapter 8 - Capital budgeting cash flow. After studying this chapter, you will understand the inputs that are necessary to build the relevant cash flows that are required to determine whether a particular investment is likely to create or destroy value for shareholders. | Chapter 8 Capital Budgeting Cash Flow Learning Goals Understand the motives for key capital budgeting expenditures and the steps in the capital budgeting process. Define basic capital budgeting terminology. Discuss relevant cash flows, expansion versus replacement decisions, sunk costs and opportunity costs, and international capital budgeting. Learning Goals (cont.) Calculate the initial investment associated with a proposed capital expenditure. Find the relevant operating cash inflows associated with a proposed capital expenditure. Determine the terminal cash flow associated with a proposed capital expenditure. The Capital Budgeting Decision Capital Budgeting is the process of identifying, evaluating, and implementing a firm’s investment opportunities. It seeks to identify investments that will enhance a firm’s competitive advantage and increase shareholder wealth. The typical capital budgeting decision involves a large up-front investment followed by a series of smaller cash . | Chapter 8 Capital Budgeting Cash Flow Learning Goals Understand the motives for key capital budgeting expenditures and the steps in the capital budgeting process. Define basic capital budgeting terminology. Discuss relevant cash flows, expansion versus replacement decisions, sunk costs and opportunity costs, and international capital budgeting. Learning Goals (cont.) Calculate the initial investment associated with a proposed capital expenditure. Find the relevant operating cash inflows associated with a proposed capital expenditure. Determine the terminal cash flow associated with a proposed capital expenditure. The Capital Budgeting Decision Capital Budgeting is the process of identifying, evaluating, and implementing a firm’s investment opportunities. It seeks to identify investments that will enhance a firm’s competitive advantage and increase shareholder wealth. The typical capital budgeting decision involves a large up-front investment followed by a series of smaller cash inflows. Poor capital budgeting decisions can ultimately result in company bankruptcy. Motives for Capital Expenditures Proposal Generation Review and Analysis Decision Making Implementation Follow-up Our Focus Steps in the Process Basic Terminology: Independent versus Mutually Exclusive Projects Independent Projects, on the other hand, do not compete with the firm’s resources. A company can select one, or the other, or both—so long as they meet minimum profitability thresholds. Mutually Exclusive Projects are investments that compete in some way for a company’s resources—a firm can select one or another but not both. 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 .
