Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 12, Problem 4Q
Summary Introduction
To explain: The reason to not deduct the interest charges in capital budgeting’s cash flow calculations.
Introduction:
Capital Budgeting:
The process to evaluate an alternative based on the estimated future benefits and costs is known as capital budgeting. It is a management tool that is effective in decision making related to the business operations.
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Students have asked these similar questions
Which of the following is NOTa relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
a.
Shipping and installation costs.
b.
Cannibalization effects.
c.
Opportunity costs.
d.
Sunk costs that have been expensed for tax purposes.
e.
Changes in net working capital.
Please explain your answer for better understanding.
Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?
Why is risk incorporated into capital budgeting and how is it incorporated into the process of evaluating a project?
Chapter 12 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Ch. 12 - Prob. 1QCh. 12 - Prob. 2QCh. 12 - Explain why net operating working capital is...Ch. 12 - Prob. 4QCh. 12 - Prob. 5QCh. 12 - Prob. 6QCh. 12 - Prob. 7QCh. 12 - Prob. 8QCh. 12 - Prob. 9QCh. 12 - If you were the CFO of a company that had to...
Ch. 12 - Prob. 11QCh. 12 - REQUIRED INVESTMENT Tannen Industries is...Ch. 12 - Prob. 2PCh. 12 - AFTER-TAX SALVAGE VALUE Karsted Air Services is...Ch. 12 - REPLACEMENT ANALYSIS The Oviedo Company is...Ch. 12 - OPTIMAL CAPTTAL BUDGET Marble Construction...Ch. 12 - DEPRECIATION METHODS Charlene is evaluating a...Ch. 12 - SCENARIO ANALYSIS Huang Industries is considering...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate the...Ch. 12 - NEW PROJECT ANALYSIS You must evaluate a proposal...Ch. 12 - Dauten is offered a replacement machine which has...Ch. 12 - REPLACEMENT ANALYSIS St. Johns River Shipyards is...Ch. 12 - PROJECT RISK ANALYSIS The Butler-Perkins Company...Ch. 12 - NEW PROJECT ANALYSIS Holmes Manufacturing is...Ch. 12 - REPLACEMENT ANALYSIS The Darlington Equipment...Ch. 12 - REPLACEMENT ANALYSIS The Bigbee Bottling Company...Ch. 12 - ABANDONMENT OPTION The Sorensen Supplies Company...Ch. 12 - OPTIMAL CAPITAL BUDGET Hampton Manufacturing...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Why are interest charges not deducted when a projects cash flows are calculated for use in a capital budgeting analysis?arrow_forward(1) What are the three types of risk that are relevant in capital budgeting? (2) How is each of these risk types measured, and how do they relate to one another? (3) How is each type of risk used in the capital budgeting process?arrow_forwardDiscuss the principal limitations of the cash payback method for evaluating capital investment proposals.arrow_forward
- What is the importance of the Technique used for analysis on Capital budgeting cost for a projects?arrow_forwardWhich of the following should NOT be included as a cash flow in initial, operating or terminal cash flows of a capital budgeting project? A.Opportunity Costs B.Incremental Revenues C.Sunk costs D.Relevant revenues E. Incremental Costsarrow_forwardAnswer the following question: Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?arrow_forward
- What two pieces of information does the payback method providethat are absent from the other capital budgeting decision methods?arrow_forwardDiscuss how a project's risk can be incorporated into capital budgeting analysis. Should discounted cash flows be used to evaluate capital budgeting projects?arrow_forwardShould financing costs be included as an incremental cash flow in capital budgeting analysis? Explain fully.arrow_forward
- Which of the following cash flows should not be considered when evaluating a project? Changes in working capital Shipping and installation costs Sunk costs Opportunity costs Externalitiesarrow_forwardIdentify “relevant” cash flows that should and should not be included in a capital budgeting analysis.arrow_forwarde) How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcoming of this approacharrow_forward
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