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Managerial: Accounting by Elizabeth Davis, Charles E. Davis

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9

CAPITAL BUDGETING

After studying this chapter, you should be able to meet the following learning objectives (LO).

  1. Identify the cash flows associated with capital budgeting decisions. (Unit 9.1)
  2. Explain the time value of money and calculate present values of lump sums and annuities. (Unit 9.2)
  3. Use net present value to determine the acceptability of a project. (Unit 9.3)
  4. Use the internal rate of return to determine the acceptability of a project. (Unit 9.3)
  5. Calculate a project's payback period. (Unit 9.4)
  6. Calculate a project's accounting rate of return. (Unit 9.4)

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The Pitch

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Chad Davis, C&C's vice president of operations, and Jonathan Smith, C&C's vice president of marketing, were looking over the company's results from 2011. “We've got to find a way to increase our net income,” Chad started. “I don't see cost reductions alone generating the level of growth we want. The only way we can achieve a sizeable increase is from new sales. What ideas do you have, Jonathan?”

“I've looked at our sales estimates for baseball jerseys and pants, as well as for award jackets,” Jonathan replied, “and the market doesn't appear to be able to support significant growth prospects in those product lines. I've been trying to come up with something new and different, but I don't have any ideas.”

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