1. Chapter 7 Fundamentals of Capital Budgeting

2. 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

3. 7-3

4. 7-4 HomeNet’s Incremental Earnings Forecast

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

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

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

8. 7-8 Product Adoption and Price Changes

9. 7-9 Product Adoption and Price Changes

10. 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

11. 7-11 Net Working Capital

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

13. 7-13 HomeNet’s Net Working Capital Requirements

14. 7-14 Change in NWC

15. 7-15 Net Working Capital with Changing Sales

16. 7-16 Free Cash Flow

17. 7-17 Free CF – alternative computation

18. 7-18 Computing HomeNet’s NPV

19. 7-19 Computing Accelerated Depreciation

20. 7-20 3-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 10-16 years) 10-year property - includes railroad tank cars, mobile homes, boilers, and certain public utility property (assets with a class life of 16-20 years) 15-year property - includes roads, shrubbery, and certain low-income housing (assets with a class life of 20-25 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:

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

22. 7-22 Computing Accelerated Depreciation

23. 7-23 Salvage Values

24. 7-24 Book Value of an Asset

25. 7-25 After-tax Salvage Values

26. 7-26 Adding Salvage Value to Free Cash Flow

27. 7-27 Adding Salvage Value to Free Cash Flow

28. 7-28 Continuation Value with Perpetual Growth

29. 7-29 Continuation Value with Perpetual Growth