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Chapter 9

Capital Budgeting and Other Long-Run Decisions

Learning Objectives

  1. Define capital expenditure decisions and capital budgets.
  2. Evaluate investment opportunities using the net present value approach.
  3. Evaluate investment opportunities using the internal rate of return approach.
  4. Calculate the depreciation tax shield and explain why depreciation is important in investment analysis only because of income taxes.
  5. Evaluate long-run decisions, other than investment decisions, using time value of money techniques.
  6. Use the payback period and the accounting rate of return methods to evaluate investment opportunities.
  7. Explain why managers may concentrate erroneously on the short-run profitability of investments rather than their net present values.

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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, ...

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