Capital Budgeting and Other Long-Run Decisions
- Define capital expenditure decisions and capital budgets.
- Evaluate investment opportunities using the net present value approach.
- Evaluate investment opportunities using the internal rate of return approach.
- Calculate the depreciation tax shield and explain why depreciation is important in investment analysis only because of income taxes.
- Evaluate long-run decisions, other than investment decisions, using time value of money techniques.
- Use the payback period and the accounting rate of return methods to evaluate investment opportunities.
- Explain why managers may concentrate erroneously on the short-run profitability of investments rather than their net present values.
For several years, Steve Wilson, president of Wilson Air, has operated a successful business flying passengers between Seattle and resorts in Idaho and around Washington State.
Now Steve thinks it's time to consider adding to his fleet of three seven-passenger aircraft. “Look,” he explains to his chief accountant, Ellen Ortega, “with another plane, we can service 3,500 additional round-trip passengers a year. At an average fare of $200, that's $700,000!” “But don't forget,” Ellen points out, “a new plane will cost around $1,000,000, ...