Capital Budgeting

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Capital Budgeting
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NATURE OF CAPITAL INVESTMENTS

• LARGE AMOUNTS INVESTED
• PERMANENT
• SET STRATEGIC DIRECTION
• LONG PLANNING HORIZONS
• ACCURATE FORECASTS REQUIRED
• VISIBLE MONUMENTS

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ADMINISTRATIVE STEPS

• IDENTIFY PROJECTS
• COLLECT DATA
• ANALYZE PROFIT AND RISK
• GAIN REGULATORY APPROVALS
• ARRANGE FINANCING
• IMPLEMENT
• CONTROL

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CAPITAL BUDGETING TO OPTIMIZE PROFIT AN EXAMPLE
Project R-of-R C-of-C Mil. Of 's
Non-Discretionary -- 10 80
A 20 10 150
B 18 10 75
C 16 10 200
D 14 12 60
E 9 12 10
F 6 12 40
G 4 12 5
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CAPITAL BUDGETING TO OPTIMIZE PROFIT

• PERCENT

NON DISCRETIONARY
MARGINAL COST OF CAPITAL
INVESTMENT OPPORTUNITY SCHEDULE
A B C D E F G

OPTIMUM CAPITAL BUDGET 565 MIL.