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10 pages. This paper will explain the use of capital budgeting in the real world by explaining how companies actually use the theories that are studied in a text. Using actual companies examples will be shown of the use of capital budgeting in different circumstances. Bibliography lists 5 sources.
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in a text. Using fictional or actual companies examples will be shown of the use of capital budgeting in different circumstances. THE USE OF CAPITAL BUDGETING: AN EXAMPLE
An excellent example of when capital budgeting comes into play in a firm would be when Boeing won a ten-year contract estimated to be worth 4.5 billion dollars to build
spy satellites. This contract emphasizes the gains the company has made since its 1996 agreement to buy McDonnell Douglas and part of Rockwell International. These purchases greatly expanded
Boeings business in the space and defense arenas (Lane 1999). Boeing has not yet decided whether to build the satellites in-house or contract out the satellite construction. It will
all depend on which is financially more promising for the company. These diversifications will tend to help Boeing, which has had a difficult year after losing its position as
prime satellite manufacturer for the Teledesic project to Motorola, Inc. Boeing is also an investor in Ellipso that is a less successful satellite based telecommunications project. Analysts agree
that telecommunications is very important to Boeing because it promises tremendous growth during the next decade. Boeings satellite activities are largely due to its acquisition of the aerospace sector
of Rockwell International in 1996 (Wilhelm 1999). The beta value for Boeing was showing at that time to be .95 for the company and .84 for the industry. The
beta, or risk index, is the difference between an actual value and an expected value. In a financial sense it is the chance of incurring a financial loss.
Risk in capital budgeting in this example means that the Boeing management does not know the amount and the timing of a proposed projects future cash flows. In reviewing
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