Chapter 8, Capital Budgeting Decisions, Part II

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Capital Budgeting Decisions–Part II Prepared Preparedby by

Douglas DouglasCloud Cloud

Pepperdine PepperdineUniversity University

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Objectives Objectives     

Analyze investents in !or"ing capital#  After re ading  After reading reading redecisions ading this this Analyze replaceent using t!o chapter, you you should should approac$es# chapter, able be able to: to:analysis# %&plain and applybe sensitivity Describe and analyze utually e&clusive investents# Describe t$e 'odi(ied Accelerate Cost )ecovery *yste and use it in evaluating investents#

Continued Continued

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Objectives Objectives 

%&plain $o! capital budgeting applies to not(or-pro(it (or-pro(it entities and to social !el(are#

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Investents Invest ents in in or"ing o  or"ing Capital Investents or"ing Capital Current assets - Current liabilities . Working capita capitall

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Increases Increases in in or"ing or"ing Capital Capital Investent Investent 

Copanies strive to reduce !or"ing capital re0uireents to increase returns  Copanies invest to reduce !or"ing capital %&aple %&aple Annual revenues +3 Annual cas$ costs 123 Investent /3 in e0uipent +/3 in !or"ing capital 4i(e / years

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Annual Annual Increental Increental A(ter-6a& Increental A(ter-6a& A(ter-6a& Cas$ Cas$ 7lo!s 7lo!s 9ears 9ears 1-/: 1-/: 6a& Cas$ Coputation 7lo! +3 +3

)evenues Cas$ e&penses variable and (i&ed: 123 Cas$ in(lo! be(ore ta&es 183 Depreciation /3 ; /: 13 Increase in ta&able incoe 83 Incoe ta&es , percent: +32