Chapter 7 Fundamentals of Capital Budgeting

7-2 Forecasting Earnings Indirect Effects on Incremental Earnings –Opportunity Costs –Project Externalities Common Mistake: The Opportunity Cost of an Idle Asset Sunk Costs and Incremental Earnings –Fixed Overhead Expenses –Past Research and Development Expenditures

7-3

7-4 HomeNet’s Incremental Earnings Forecast

7-5 The Opportunity Cost of HomeNet’s Lab Space

7-6 The Opportunity Cost of HomeNet’s Lab Space

7-7 HomeNet’s Incremental Earnings Forecast Including Cannibalization and Lost Rent

7-8 Product Adoption and Price Changes

7-9 Product Adoption and Price Changes

7-10 Determining Free Cash Flow and NPV Calculating the Free Cash Flow from Earnings –Capital Expenditures and Depreciation –Net Working Capital (NWC) Calculating the NPV Further Adjustments toFree Cash Flow –Accelerated Depreciation –Liquidation or Salvage Value –Terminal or Continuation Value

7-11 Net Working Capital

7-12 Calculation of HomeNet’s Free Cash Flow (Including Cannibalization and Lost Rent)

7-13 HomeNet’s Net Working Capital Requirements

7-14 Change in NWC

7-15 Net Working Capital with Changing Sales

7-16 Free Cash Flow

7-17 Free CF – alternative computation

7-18 Computing HomeNet’s NPV

7-19 Computing Accelerated Depreciation

year property - includes small tools, houses, and assets used in research and development activities (assets with a class life of 4 years or less) 5-year property - includes automobiles, trucks, computers and peripheral equipment, and office machines (assets with a class life of 4-10 years) 7-year property - includes office furniture and fixtures, agriculture equipment, oil exploration and development equipment, railroad track, manufacturing equipment, and any property not designated by law as being in any other class (assets with a class life of years) 10-year property - includes railroad tank cars, mobile homes, boilers, and certain public utility property (assets with a class life of years) 15-year property - includes roads, shrubbery, and certain low-income housing (assets with a class life of years) 20-year property - includes waste-water treatment plants and sewer systems (assets with a class life of more than 25 years) 27.5 year property - includes residential rental property 31.5 year property - includes nonresidential real property Examples of MACRS property classes:

7-21 MACRS Depreciation Table Showing the Percentage of the Asset’s Cost That May Be Depreciated Each Year Based on Its Recovery Period

7-22 Computing Accelerated Depreciation

7-23 Salvage Values

7-24 Book Value of an Asset

7-25 After-tax Salvage Values

7-26 Adding Salvage Value to Free Cash Flow

7-27 Adding Salvage Value to Free Cash Flow

7-28 Continuation Value with Perpetual Growth

7-29 Continuation Value with Perpetual Growth