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WHAT TO DISCOUNT

WHAT TO DISCOUNT. 1. Only cash flow is relevant. 2. Estimate incremental(after tax) cash flow. 3. Be consistent in treatment of inflation. 4. Recognize project interactions. Capital Budgeting: New vs Replacement. 1. INITIAL OUTLAY 2. CASH FLOWS 3. TERMINAL CASH FLOW 1. INITIAL OUTLAY:

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WHAT TO DISCOUNT

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  1. WHAT TO DISCOUNT 1. Only cash flow is relevant. 2. Estimate incremental(after tax) cash flow. 3. Be consistent in treatment of inflation. 4. Recognize project interactions.

  2. Capital Budgeting: New vs Replacement 1. INITIAL OUTLAY 2. CASH FLOWS 3. TERMINAL CASH FLOW 1. INITIAL OUTLAY: a) Purchase price of M/C +Installation Cost +Trans. Cost… b) Sales of old M/C c) Working Capital 2. Cash Flows: a) Add back depreciation b) Do not include interest costs c) Working capital changes 3. Terminal Cash Flow: a) Salvage Value of New M/C tax effect b) Working Capital

  3. T9-4 Annual Cash Flows (In Thousands)

  4. T9-8 Inflation Effects

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