By Don Dayananda, Richard Irons, Steve Harrison, John Herbohn, Patrick Rowland

This e-book for complex scholars and pros in administration and finance explains the monetary appraisal of capital budgeting initiatives. It develops uncomplicated ideas, ideas and methods and applies them to case reviews in forestry, estate and foreign investments. source constraints are brought to the capital budgeting judgements with quite a few labored examples utilizing linear programming ideas. All calculations are commonly supported via Excel workbooks on the internet, and finish of bankruptcy questions.

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Extra resources for Capital Budgeting: Financial Appraisal of Investment Projects

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24 Capital Budgeting Initial investment The initial net investment in an asset expansion project is defined as the project’s initial cash outflow, that is, the capital outlay (or capital expenditure or capital outflow) at the beginning of the project. It is calculated using the following typical format: Cost of new asset(s) + Installation and shipping costs + Initial investment in working capital = Initial investment It is worth noting here that for the purpose of tax-allowable depreciation, working capital is not an allowable item.

Three ways of calculating the tax shield of allowable depreciation are presented in a later section of this chapter. 20 Capital Budgeting Tax payable Tax payable is a cash outflow. The form of tax encountered in project analysis is corporate tax. It is calculated as a percentage of taxable income. The rate of corporate tax is usually a fixed rate for every dollar of taxable income. Taxation is a very volatile area, and tax rules are constantly changing. In any situation where a project may be subject to particular and special tax laws or rulings, expert tax advice must be sought.

E. from $2,000 to $2,500). This is shown under year 1. Up to year 6, working capital requirements increase annually, thus tying more cash into working capital. In years 7 and 8, working capital is recovered. In year 7, working capital requirements decrease by $1,500 from $4,500 to $3,000, thus releasing cash tied up in the working capital. At the end of the project’s life, the remaining $3,000 in the pool of working capital is recovered and generates a positive cash inflow. Initial investment in the Delta Project example is equal to initial capital outlay ($1 million) plus the investment in working capital at the beginning of the project ($2,000).

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