Capital Budgeting and 
                   Capital Budgeting and 
                  Estimating Cash Flows
                   Estimating Cash Flows
              ThThee  CCapiapitatall Bud Budgegettinging Pr Proocecessss
              GenerGeneratinating g InvesInvestmetmennt Projt Projeect ct 
                PrProopopossalsals
              EsEstitimmatinating g PrProojecject t “A“Afterfter-T-Taxax  
                InInccrerememenntatall O Operperatinating g CCasashh  
                FlFlows”ows”
12-2
        What is 
        What is 
        Capital Budgeting?
        Capital Budgeting?
          ThThee p prroocecessss  of iof identifdentifyyiing,ng,  
          aannaallyyzizingng, , aannd selecd selectiting ng 
         ininvvesesttmment pent prroojecjecttss w whohosse e 
           retretuurrnns (cas (cash sh flowflowss) ) aarere  
         expecexpected ted to to eextextennd d bebeyonyond d 
                  ononee  yyeaearr..
12-3
                    The Capital 
                    The Capital 
                    Budgeting Process
                    Budgeting Process
         GGeenneerraattee  iinnvevessttmmeenntt  pprrooppoossaalls s 
           coconnssiissttenentt  wwiitthh  tthhe e ffiirrmm’’ss  ststrratateeggiic c 
           oobbjjececttiivvees.s.
         EEssttiimmatate e aafftteerr--ttaaxx  iinnccrrememeennttaall  
           ooppereraattiinngg  ccaashsh  fflloowws s ffoorr  tthhe e 
           iinnvveeststmmeenntt  pprroojjeeccttss..
         EEvvalaluuatate e pprroojjeecctt  iinncrcreemmeennttalal  cacasshh  
           fflloowws.s.
12-4
                  The Capital 
                   The Capital 
                  Budgeting Process
                   Budgeting Process
        SeSellecect pt prroojecjecttss  basbased ed on on aa  vvalualuee--
          mamaximizinximizing g aacceccepptatanncce cre criiteteriorion.n.
        RReeveevalualuaate ite immpplemlemented ented 
          ininvvestmestment ent projectsprojects co continntinually ually 
          and and perperfoforrm pm postaostauudiditsts f for or 
          completed pcompleted prroojecjects.ts.
12-5
        Classification of Investment 
        Classification of Investment 
        Project Proposals
        Project Proposals
   1.  1.   N Neeww p prroodduuctcts os orr ex exppaannssioionn  oof f 
      exexistiistinngg p prroodduucctsts
   2.  2.   R Reepplalacemcemenent ot of exf exististiningg eq equuipipmmeennt ot orr  
      bbuuildildiinnggss
   3.  3.   R Reeseseararchch a anndd d deveveloeloppmmenentt
   4.  4.   E Exxpplolorratiatioonn
   5.  5.   O Oththerer  (e.g(e.g., ., safsafety ety oorr p poolllulutiotionn r relaelatedted))
12-6