CHAPTER: CAPITAL BUDGETING I
Identifying cash flows:
Incremental cash flow is the difference between the cash flow with the project and the cash
flow without project.
- Must be incremental/Additional
- Must be after tax
- Must be discounted (TVM)
Lost sales (by one product on the other) = sales erosion
Increase in sales( by one product on the other) = sales synergy
Sunk cost: cost that is already past and cannot be reversed
In finance, the cost of the land would be $100,000 and not $50,000. We take market value into
Working capital: a lump-sum invested today and recover at project completion.
Or we could have working capital invested for three years and then recovered in the last two
Capital budgeting is the investment decision
If NPV>0 , we accept the project
Adjusted present value (APV) considers the interaction of the investment and the financing decisions. If
APV>0, we accept.
Calculating cash flows:
Depreciation tax shield: CF from Op= (rev