Cash Flow Estimation And Capital Budgeting

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Trident University Beverley Lionel Module 3 Case: Cash Flow Estimation and Capital Budgeting FIN 501 Strategic Corporate Finance Dr. Edward Kaplan May 21, 2017 ABC Golf Equipment Corporation Memo to the CEO, Mr. Hillbrandt To: The CEO, Mr. Hillbrandt From: Chief Financial Officer Date: May 21, 2017 Subject: Estimating Project Cash Flows Introduction If the manufacturer plans on using debt to finance the project, should the estimated project cash flows be changed to reflect these interest charges? Why or why not? Every project has its own financing plan. It may include both debt and equity; it all depends on the availability and cost of capital. Both the debt and equity sources of capital have their own advantages and…show more content…
The expenses which have already been incurred are not considered in this because the cash flows for such activities have already been incurred and will not affect the future cash flows in any manner. Therefore, we would recommend the manufacturer not to include the expense of $200,000 studying golf clubs in decision making process. Since the expenses have already been incurred they are sunk in nature and totally irrelevant to the decision making process. If the manufacturer could rent out the factory that is storing the golf club machinery for $80,000 a year, should that be taken into account with this analysis? The process of capital budgeting is a decision making procedure. Now, this procedure includes and secludes various kinds of costs. The expenses which may affect the future cash flows are considered relevant whereas the others are ignored. (Fabozzi, & Peterson, 2010) The income which can be generated for a specific resource but cannot be earned due to its exclusive use of the resources is an income lost. They are termed as opportunity costs. While making the decision of capital budgeting the opportunity costs should be considered and not ignored as it may affect the future cash flows from the project. Therefore, we recommend the manufactures to consider the option of renting out of the factory in the capital budgeting process as it is relevant in nature and will affect the decision making process. SHORT ESSAY
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