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Chapter 8
Fundamentals of Capital Budgeting
I. Chapter Outline
The chapter outline below is correlated to the PowerPoint Lecture Slides. The PowerPoint slides are
referenced in bold.
Alternative Examples to selected textbook examples are available in the PowerPoint Lecture Slides.
Alternative Examples are referenced in bold in the chapter outline below.
8.1 Forecasting Earnings (Slide 6)
• Revenue and Cost Estimates (Slides 7–8)
• Incremental Earnings Forecast (Slide 9)
– Capital Expenditures and Depreciation (Slide 10)
– Interest Expenses (Slide 11)
– Taxes (Slide 12)
– Unlevered Net Income Calculation (Slide 13)
• Example 8.1 Taxing Losses for Projects in Profitable Companies (Slides 14–15)
• PowerPoint Alternative Example 8.1 (Slides 16–18)
• Indirect Effects on Incremental Earnings (Slides 19, 24–26)
– Opportunity Costs
– Project Externalities
• Example 8.2 The Opportunity Cost of HomeNet’s Lab Space (Slides 20–21)
• PowerPoint Alternative Example 8.2 (Slides 22–23)
• Common Mistake: The Opportunity Cost of an Idle Asset
• Sunk Costs and Incremental Earnings (Slides 27–30)
– Fixed Overhead Expenses
– Past Research and Development Expenditures
– Unavoidable Competitive Effects
• Real-World Complexities (Slide 31)
• The Sunk Cost Fallacy
• Example 8.3 Product Adoption and Price Changes (Slides 32–33)
8.2 Determining Free Cash Flow and NPV (Slide 34)
• Calculating the Free Cash Flow from Earnings (Slides 35–38)
– Capital Expenditures and Depreciation
– Net Working Capital (NWC)
• Example 8.4 Net Working Capital with Changing Sales (Slides 39–40)
• PowerPoint Alternative Example 8.4 (Slides 41–42)
• Calculating Free Cash Flow Directly (Slide 43)
The chapter summarizes sensitivity analysis and scenario analysis. The Appendix to the chapter
provides detail regarding MACRS depreciation.
But it is probable that the progress of Islam in the country was all
this time being promoted by the Muhammadan merchants and
others that frequented it. Maqrīzī (writing in the early part of the
fifteenth century) quotes one of those missionary anecdotes which
occur so rarely in the works of Arabic authors; it is told by Ibn Salīm
al-Aswāni, and is of interest as giving us a living picture of the
Muslim propagandist at work. Though the convert referred to is
neither a Christian nor a Nubian, still the story shows that there was
such a thing as conversion to Islam in Nubia in the fifteenth century.
Ibn Salīm says that he once met a man at the court of the Nubian
chief of Muqurrah, who told him that he came from a city that lay
three months’ journey from the Nile. When asked about his religion,
he replied, “My Creator and thy Creator is God; the Creator of the
universe and of all men is One, and his dwelling-place is in Heaven.”
When there was a dearth of rain, or when pestilence attacked them
or their cattle, his fellow-countrymen would climb up a high
mountain and there pray to God, who accepted their prayers and
supplied their needs before even they came down again. When he
acknowledged that God had never sent them a prophet, Ibn Salīm
recounted to him the story of the prophets Moses and Jesus and
Muḥammad, and how by the help of God they had been enabled to
perform many miracles. And he answered, “The truth must indeed
have been with them, when they did these things; and if they
performed these deeds, I believe in them.” 44
Very slowly and gradually the Nubians seem to have drifted from
Christianity into Muhammadanism. 45 The spiritual life of their Church
had sunk to the lowest ebb, and as no movement of reform sprang
up in their midst, and as they had lost touch with the Christian
Churches beyond their borders, it was only natural that they should
seek for an expression of their spiritual aspirations in the [112]religion
of Islam, whose followers had so long borne witness to its living
power among them, and had already won over some of their
countrymen to the acceptance of it. A Portuguese priest, who
travelled in Abyssinia from 1520–1527, has preserved for us a
picture of the Nubians in this state of transition; he says that they
were neither Christians, Jews nor Muhammadans, but had come to
be without faith and without laws; but still “they lived with the desire
of being Christians.” Through the fault of their clergy they had sunk
into the grossest ignorance, and now there were no bishops or
priests left among them; accordingly they sent an embassy of six
men to the king of Abyssinia, praying him to send priests and monks
to instruct them, but this the king refused to do without the
permission of the Patriarch of Alexandria, and as this could not be
obtained, the unfortunate ambassadors returned unsuccessful to
their own country. 46 The same writer was informed by a Christian
who had travelled in Nubia, that he had found 150 churches there,
in each of which were still to be seen the figures of the crucified
Christ, of the Virgin Mary, and other saints painted on the walls. In
all the fortresses, also, that were scattered throughout the country,
there were churches. 47 Before the close of the following century,
Christianity had entirely disappeared from Nubia “for want of
pastors,” but the closed churches were to be found still standing
throughout the whole country. 48 The Nubians had yielded to the
powerful Muhammadan influences that surrounded them, to which
the proselytising efforts of the Muslims who had travelled in Nubia
for centuries past no doubt contributed a great deal; on the north
were Egypt and the Arab tribes that had made their way up the Nile
and extended their authority along the banks of that river; 49 on the
south, the Muhammadan state of the Belloos, separating them from
Abyssinia. [113]These Belloos, in the early part of the sixteenth
century, were, in spite of their Muslim faith, tributaries of the
Christian king of Abyssinia; 50 and—if they may be identified with the
Baliyyūn, who, together with their neighbours, the Bajah (the
inhabitants of the so-called island of Meroe), are spoken of by Idrīsī,
in the twelfth century, as being Jacobite Christians, 51—it is probable
that they had only a few years before been converted to Islam, at
the same time as the Bajah, who had been incorporated into the
Muhammadan empire of the Fūnj, when these latter extended their
conquests in 1499–1530 from the south up to the borders of Nubia
and Abyssinia and founded the powerful state of Sennaar. When the
army of Aḥmad Grāñ invaded Abyssinia and made its way right
through the country from south to north, it effected a junction about
1534 with the army of the sultan of Maseggia or Mazaga, a province
under Muhammadan rule but tributary to Abyssinia, lying between
that country and Sennaar; in the army of this sultan there were
15,000 Nubian soldiers who, from the account given of them, appear
to have been Musalmans. 52 Fragmentary and insufficient as these
data of the conversion of the Nubians are, we may certainly
conclude from all we know of the independent character of this
people and the tenacity with which they clung to the Christian faith,
so long as it was a living force among them, that their change of
religion was a gradual one, extending through several centuries.
Let us now pass to the history of Islam among the Abyssinians, who
had received Christianity two centuries before the Nubians, and like
them belonged to the Jacobite Church.
The tide of Arab emigration does not seem to have set across the
Red Sea, the western shores of which formed part of the Abyssinian
kingdom, until many centuries after Arabia had accepted the faith of
the prophet. Up to the tenth century only a few Muhammadan
families were to be found residing in the coast towns of Abyssinia,
but at the end of the twelfth century the foundation of an Arab
dynasty alienated some of the coast-lands from the Abyssinian
kingdom. In 1300 a missionary, named Abū ʻAbd Allāh Muḥammad,
made his way into Abyssinia, calling [114]on the people to embrace
Islam, and in the following year, having collected around him
200,000 men, he attacked the ruler of Amhara in several
engagements. 53 King Saifa Arʻād (1342–1370) took energetic
measures against the Muhammadans in his kingdom, putting to
death or driving into exile all those who refused to embrace
Christianity. 54 At the close of the same century the disturbed state of
the country, owing to the civil wars that distracted it, made it
possible for the various Arab settlements along the coast to make
themselves masters of the entire seaboard and drive the Abyssinians
into the interior, and the king, Baʼeda Māryām (1468–1478), is said
to have spent the greater part of his reign in fighting against the
Muhammadans on the eastern border of his kingdom. 55 In the early
part of the sixteenth century, while the powerful Muhammadan
kingdom of Adal, between Abyssinia and the southern extremity of
the Red Sea, and some others were bitterly hostile to the Christian
power, there were others again that formed peaceful tributaries of
“Prester John”; e.g. in Massowah there were Arabs who kept the
flocks of the Abyssinian seigniors, wandering about in bands of thirty
or forty with their wives and children, each band having its Christian
“captain.” 56 Some Musalmans are also mentioned as being in the
service of the king and being entrusted by him with important
posts; 57 while some of these remained faithful to Islam, others
embraced the prevailing religion of the country. What was implied in
the fact of these Muhammadan communities being tributaries of the
king of Abyssinia, it is difficult to determine. The Musalmans of
Ḥadya had along with other tribute to give up every year to the king
a maiden who had to become a Christian; this custom was in
accordance with an ancient treaty, which the king of Abyssinia has
always made them observe, “because he was the stronger”; besides
this, they were forbidden to carry arms or put on war-apparel, and,
if they rode, their horses were not to be saddled; “these orders,”
they said, “we have always obeyed, so that the [115]king may not put
us to death and destroy our mosques. When the king sends his
people to fetch the maiden and the tribute, we put her on a bed,
wash her and cover her with a cloth, and recite the prayers for the
dead over her and give her up to the people of the king; and thus
did our fathers and our grandfathers before us.” 58
But whatever may have been the extent of the Christian Church, it
received a blow from the Vandal persecutions from which it never
recovered. For nearly a century the Arian Vandals persecuted the
orthodox with relentless fury; sent their bishops into exile, forbade
the public exercise of their religion and cruelly tortured those who
refused to conform to the religion of their conquerors. 90 When in
534, Belisarius crushed the power of the Vandals and restored North
Africa to the Roman Empire, only 217 bishops met in the Synod of
Carthage 91 to resume the direction of the Christian Church. After the
fierce and long-continued persecution to which they had been
subjected the number of the faithful must have been very much
reduced, and during the century that elapsed before the coming of
the Muhammadans, the inroads of the barbarian Moors, who shut
the Romans up in the cities and other centres of population, and
kept the mountains, the desert and the open country for
themselves, 92 the prevalent disorder and ill-government, and above
all the desolating plagues that signalised the latter half of the sixth
century, all combined to carry on the work of destruction. Five
millions of Africans are said to have been consumed by the wars and
government of the Emperor Justinian. The wealthier [124]citizens
abandoned a country whose commerce and agriculture, once so
flourishing, had been irretrievably ruined. “Such was the desolation
of Africa, that in many parts a stranger might wander whole days
without meeting the face either of a friend or an enemy. The nation
of the Vandals had disappeared; they once amounted to an hundred
and sixty thousand warriors, without including the children, the
women, or the slaves. Their numbers were infinitely surpassed by
the number of Moorish families extirpated in a relentless war; the
same destruction was retaliated on the Romans and their allies, who
perished by the climate, their mutual quarrels, and the rage of the
barbarians.” 93
In 646, the year before the victorious Arabs advanced from Egypt to
the subjugation of the western province, the African Church that had
championed so often the purity of Christian doctrine, was stirred to
its depths by the struggle against Monotheletism; but when the
bishops of the four ecclesiastical provinces in the archbishopric of
Carthage, viz. Mauritania, Numidia, Byzacena and Africa
Proconsularis, held councils to condemn Monotheletism, and wrote
synodal letters to the Emperor and the Pope, there were only sixty-
eight bishops who assembled at Carthage to represent the last-
mentioned province, and forty-two for Byzacena. The numbers from
the other two dioceses are not given, but the Christian population
had undoubtedly suffered much more in these than in the two other
dioceses which were nearer to the seat of government. 94 It is
exceedingly unlikely that any of the bishops were absent on an
occasion that excited so much feeling, when zeal for Christian
doctrine and political animosity to the Byzantine court both
combined in stimulating this movement, and when Africa took the
most prominent part in stirring up the opposition that led to the
convening of the great Lateran Council of 648. This diminution in the
number of the African bishops certainly points to a vast decrease in
the Christian population, and in consideration of the numerous
causes contributing to a decay of the population, too great
[125]stress even must not be laid upon the number of these, because
an episcopal see may continue to be filled long after the diocese has
sunk into insignificance.
Amélineau, p. 3; Caetani, vol. iv. p. 81 sq. Justinian is said to have had 200,000
1
Copts put to death in the city of Alexandria, and the persecutions of his
successors drove many to take refuge in the desert. (Wansleben: The Present
State of Egypt, p. 11.) (London, 1678.) ↑
Renaudot, p. 161. Severus, p. 106. ↑
2
John, Jacobite bishop of Nikiu (second half of seventh century), p. 584.
3
Caetani, vol. iv. pp. 515–16. ↑
Bell, p. xxxvii. But the exactions and hardships that, according to Maqrīzī, the
4 Copts had to endure about seventy years after the conquest hardly allow us to
extend this period so far as Von Ranke does: “Von Aegypten weiss man durch die
bestimmtesten Zeugnisse, dass sich die Einwohner in den nächsten Jahrhunderten
unter der arabischen Herrschaft in einem erträglichen Zustand befunden haben.”
(Weltgeschichte, vol. v. p. 153, 4th ed.) ↑
John of Nikiu, p. 560. ↑
5
Id. p. 585. “Or beaucoup des Égyptiens, qui étaient de faux chrétiens,
6
renièrent la sainte religion orthodoxe et le baptême qui donne la vie,
embrassèrent la religion des Musulmans, les ennemis de Dieu, et acceptèrent la
détestable doctrine de ce monstre, c’est-à-dire de Mahomet; ils partagèrent
l’égarement de ces idolâtres et prirent les armes contre les chrétiens.” ↑
Qurra b. Sharīk (governor of Egypt from 709 to 714), or his predecessor,
7 appears to have insisted on the converts continuing to pay jizyah. (Becker,
Papyri Schott-Reinhardt, p. 18.) ↑
Ibn Saʻd, Ṭabaqāt, vol. v. p. 283. ↑
8
Caetani, vol. iv. p. 618; vol. v. pp. 384–5. ↑
9
Severus, pp. 172–3. ↑
10
Id. pp. 205–6. ↑
11
“Sans aucun doute il y eut dans la multiplicité des martyrs une sorte
12
de résistance nationale contre les gouverneurs étrangers.”
(Amélineau, p. 58.) ↑
Amélineau, pp. 57–8. ↑
13
Abū Ṣāliḥ, pp. 163–4. ↑
14
Amélineau, pp. 53–4, 69–70. ↑
15
Abū Ṣāliḥ gives an account of some monks who embraced the faith of
16
the Prophet, and these are probably representative of a larger number
of whom the historian has left no record, as lacking the peculiar circumstances of
loss to the monastery or of recantation that made such instances of interest to him
(pp. 128, 142). ↑
Lane, pp. 546, 549. ↑
17
Lüttke (1), vol. i. pp. 30, 35. Dr. Andrew Watson writes: “No year has passed
18
during my residence of forty-four years in the Nile valley without my hearing
of several instances of defection. The causes are, chiefly, the hope of worldly gain
of various kinds, severe and continued persecution, exposure to the cruelty and
rapacity of Moslem neighbours, and personal indignities as well as political
disabilities of various kinds.” (Islam in Egypt: Mohammedan World, p. 24.) ↑
Severus, pp. 122, 126, 143. One of the very first occasions on which they had
19 to complain of excessive taxation was when Menas, the Christian prefect of
Lower Egypt, extorted from the city of Alexandria 32,057 pieces of gold, instead of
22,000 which ʻAmr had fixed as the amount to be levied. (John of Nikiu, p. 585.)
Renaudot (p. 168) says that after the restoration of the Orthodox hierarchy, about
seventy years after the Muhammadan conquest, the Copts suffered as much at its
hands as at the hands of the Muhammadans themselves. ↑
Maqrīzī mentions five other risings of the Copts that had to be crushed by force
20 of arms, within the first century of the Arab domination. (Maqrīzī (2), pp. 76–
82.) ↑
Renaudot, pp. 189, 374, 430, 540. ↑
21
Id. p. 603. ↑
22
Id. pp. 432, 607. Nāṣir-i-K͟ husrau: Safar-nāmah, ed. Schefer, pp. 155–6. ↑
23
Renaudot, pp. 212, 225, 314, 374, 540. ↑
24
Renaudot, p. 388. ↑
25
Id. pp 567, 571, 574–5. ↑
26
Wansleben, p. 30. Wansleben mentions another instance
27
(under different circumstances) of the decay of the Coptic
Church, in the island of Cyprus, which was formerly under the jurisdiction of the
Coptic Patriarch: here they were so persecuted by the Orthodox clergy, who
enjoyed the protection of the Byzantine emperors, that the Patriarch could not
induce priests to go there, and consequently all the Copts on the island either
accepted Islam or the Council of Chalcedon, and their churches were all shut up.
(Id. p. 31.) ↑
Renaudot, p. 377. ↑
28
Renaudot, p. 575. ↑
29
Relation du voyage du Sayd ou de la Thebayde fait en 1668, par les PP.
30 Protais et Charles-François d’Orleans, Capuchins Missionaires, p. 3.
(Thevenot, vol. ii.) ↑
Caetani, vol. iv. p. 520. ↑
31
Ishok of Romgla, pp. 272–3. ↑
32
Idrīsī, p. 32. ↑
33
Maqrīzī (2), tome i. 2me partie, p. 131. ↑
34
Maqrīzī, pp. 128–30. ↑
35
Burckhardt (1), p. 494. ↑
36
About twelve miles above the modern Khartum. ↑
37
Artin, pp. 62, 144. ↑
38
Becker, Geschichte des östlichen Sūdān, p. 160. ↑
39
Vol. iv. p. 396. ↑
40
Slatin Pasha records a tradition current among the
41
Danagla Arabs that this town was founded by
their ancestor, Dangal, who called it after his own name. (This however is
impossible, inasmuch as Dongola was in existence in ancient Egyptian times, and
is mentioned on the monuments. See Vivien de Saint-Martin, vol. ii. p. 85.)
According to their tradition, this Dangal, though a slave, rose to be ruler of Nubia,
but paid tribute to Bahnesa, the Coptic bishop of the entire district lying between
the present Sarras and Debba. (Fire and Sword in the Sudan, p. 13.) (London,
1896.) ↑
Ibn Salīm al-Aswānī, quoted by Maqrīzī: Kitāb al-K͟ hiṭaṭ, vol. i. p. 190. (Cairo,
42
a.h. 1270.) ↑