SMG FE 323 Chapter Notes - Chapter ch.9: Cash Flow, Current Liability, Opportunity Cost

• School: Boston University
• Department: Finance
• Course: SMG FE 323
• Professor: Cornelia Newell

Document Summary

9. 1 the capital budgeting process lists the projects and investments that a company plans to undertake during the next period. Firms analyze projects and investment opportunities and decide which ones to accept through a process. Incremental earnings of a project that is the a(cid:373)ou(cid:374)t (cid:271)(cid:455) (cid:449)hi(cid:272)h a fi(cid:396)(cid:373)"s earnings are expected to change as result of an investment decision. The incremental earnings forecast tells us how the decision will affect the fi(cid:396)(cid:373)"s (cid:396)epo(cid:396)ted p(cid:396)ofits f(cid:396)o(cid:373) a(cid:374) a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g pe(cid:396)spe(cid:272)ti(cid:448)e. 9. 2 forecasting incremental earnings: operating expenses versus capital expenditures. Not directly listed as expenses, they are not directly listed as expenses when calculating earnings. Instead the firm deducts a fraction of the cost of these items each year as depreciation. Simple straight-line depreciation, in which an asset"s (cid:272)ost is di(cid:448)ided e(cid:395)uall(cid:455) o(cid:448)e(cid:396) its dep(cid:396)e(cid:272)ia(cid:271)le life: incremental revenue and cost estimates. A new product typically has lower sales initially as customer gradually become aware of the product.