After studying Chapter 12, you should be able to:
- Define capital budgeting and identify the steps involved in the capital budgeting process.
- Explain the procedure used to generate long-term project proposals within the firm.
- Justify why cash, not income, flows are the most relevant to capital budgeting decisions.
- Summarize in a checklist the major concerns to keep in mind as one prepares to determine relevant capital budgeting cash flows.
- Define the terms sunk cost and opportunity cost and explain why sunk costs must be ignored, whereas opportunity costs must be included, in capital budgeting analysis.
- Explain how tax considerations, as well as depreciation for tax purposes, affect capital budgeting cash flows.
- Determine initial, interim, and terminal period after-tax, incremental, operating cash flows associated with a capital investment project.