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Managerial Accounting For Dummies by Mark P. Holtzman

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Chapter 10

Capital Budgeting: Should You Buy That?

In This Chapter

arrow Distinguishing between opportunity and incremental costs

arrow Using the cash payback method

arrow Understanding time value of money and the net present value method

arrow Estimating internal rate of return

arrow Keeping nonquantitative factors in your sights

After a big project is already underway, managers can’t just go to the customer service desk with their receipts and ask to get their money back. Before investing big bucks in a long-term project, then, managers must carefully plan all the project’s details and determine that it will deliver reasonable returns for the company. This planning means estimating the future cash flows that the project will bring in and coming to a reasonable determination that the project’s cash inflows will exceed its cost.

In this chapter, I show you several techniques for making decisions about whether to pursue long-term capital projects. First, I review the idea of incremental and opportunity costs — ...

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