Capital budgeting

Second, they typically are costly to

Finally, they define the ____ direction of the business.

proposed capital budgeting projects are ____ according to purpose and size

proposed capital budgeting projects are classified according to ___ and ___

investor-owned businesses, projects that are expected to ______ to shareholder wealth

not-for-profit businesses, identifies a project’s expected ____ on the business’s financial condition

financial analysis: estimate the cash flows

initial cash outlay (cost)
Operating flows
Terminal (ending) flow

initial cash outlay (___)
Operating flows
Terminal (ending) flow

Initial cash outlay (cost)
Operating flows
Terminal (___) flow

financial analysis assess the project's

Estimate the project cost of capital (____ ____ of capital or discount rate)

Estimate the project cost of capital (opportunity cost of capital or ___ ___)

financial analysis measures the ___ ___

Key Concepts in Cash Flow Estimation

Focus on __ __ as opposed to accounting income

Cash flow timing

-Usually cash flows occur ______
-Often approximated by annual flows

Cash flow timing

-Usually cash flows occur daily
-Often approximated by ___ flows

Project life

-Often ____
-Often truncated if long (terminal value)

Key Concepts in Cash Flow Estimation

- ____________________________
-Do include opportunity costs:
For capital
For other resources

Key Concepts in Cash Flow Estimation

-Do not include sunk costs
-Do include _________:
For capital
For other resources

investment at t = 0 ( _ _ _ ) s

note that these cash flows are estimates

If this were a replacement rather than a new (expansion) project, would the analysis change?

The relevant operating cash flows would be ___ ___ between the cash flows on the new and old project.

However, selling the old equipment would produce an immediate cash inflow, but the salvage value at the end of its original life is foregone

There are many different approaches to breakeven in project analysis:

Time breakeven
___ variable breakeven

There are many different approaches to breakeven in project analysis:

___ breakeven
Input variable breakeven

time breakeven, which is measured by ---------- (or --------- period).

Advantages of Payback:

1. ____ to calculate and understand.
Provides an indication of a project’s risk and ___
Disadvantages of Payback:

1. Ignores time value.
2. Ignores all cash flows that occur after the payback period.

Advantages of Payback:

1. Easy to calculate and understand.
Provides an indication of a project’s risk and liquidity.

Disadvantages of Payback:

1. Ignores ____ ___.
2. Ignores all cash flows that occur after the payback period.