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Financial Statements by Thomas Ittelson

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Chapter 22. Making Good Capital Investment Decision

At the last board meeting, our esteemed directors approved AppleSeed’s plans for a major product line expansion into gourmet potato chips. Now we are weighing two alternative capital projects designed to meet that goal: (1) building a new plant from scratch—the so-called “greenfield” option, or (2) acquiring an existing business, Chips-R-Us—the “purchase” option. In this chapter, we’ll prepare a cash flow forecast for both alternatives and then perform an NPV analysis to help us select the best capital project for AppleSeed going forward.

Projecting Sales

Projecting sales is a good place to start when preparing a cash flow forecast. So here we go. See the graph following.

AppleSeed’s purchase ...

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