Chapter 12 - Capital budgeting and estimating cash flows. After studying chapter 12, you should be able to: Define “capital budgeting” and identify the steps involved in the capital budgeting process, explain the procedure used to generate longterm project proposals within the firm, justify why cash, not income, flows are the most relevant to capital budgeting decisions,. | Chapter 12 Capital Budgeting and Estimating Cash Flows © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Capital Budgeting and Estimating Cash Flows The Capital Budgeting Process Generating Investment Project Proposals Estimating Project “After-Tax Incremental Operating Cash Flows” What is Capital Budgeting? The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. The Capital Budgeting Process Generate investment proposals consistent with the firm’s strategic objectives. Estimate after-tax incremental operating cash flows for the investment projects. Evaluate project incremental cash flows. The Capital Budgeting Process Select projects based on a value-maximizing acceptance criterion. Reevaluate implemented investment projects continually and perform postaudits for completed projects. Classification of Investment Project Proposals 1. New products or expansion of existing products 2. Replacement of existing equipment or buildings 3. Research and development 4. Exploration 5. Other (., safety or pollution related) Screening Proposals and Decision Making 1. Section Chiefs 2. Plant Managers 3. VP for Operations 4. Capital Expenditures Committee 5. President 6. Board of Directors Advancement to the next level depends on cost and strategic importance. Estimating After-Tax Incremental Cash Flows Cash (not accounting income) flows Operating (not financing) flows After-tax flows Incremental flows Basic characteristics of relevant project flows Estimating After-Tax Incremental Cash Flows Ignore sunk costs Include opportunity costs Include project-driven changes in working capital net of spontaneous changes in current liabilities Include effects of inflation Principles that must be adhered to in the estimation Tax Considerations and Depreciation Generally, profitable firms prefer to use an . | Chapter 12 Capital Budgeting and Estimating Cash Flows © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, . Carroll College, Waukesha, WI Capital Budgeting and Estimating Cash Flows The Capital Budgeting Process Generating Investment Project Proposals Estimating Project “After-Tax Incremental Operating Cash Flows” What is Capital Budgeting? The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. The Capital Budgeting Process Generate investment proposals consistent with the firm’s strategic objectives. Estimate after-tax incremental operating cash flows for the investment projects. Evaluate project incremental cash flows. The Capital Budgeting Process Select projects based on a value-maximizing acceptance criterion. Reevaluate implemented investment projects continually and perform postaudits for completed projects. Classification of Investment
