Chapter 11

Chapter 11 - CHAPTER 11 The Basics of Capital Budgeting...

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    11-1 CHAPTER 11 The Basics of Capital Budgeting Should we build this plant?
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    11-2 What is capital budgeting? Analysis of potential additions to  fixed assets. Long-term decisions; involve large  expenditures. Very important to firm’s future.
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    11-3 Steps to capital budgeting 1. 2. Assess riskiness of CFs. 3. Determine the appropriate cost of capital. 4. Find NPV and/or IRR. 5. Accept if NPV > 0 and/or IRR > WACC.
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    11-4 What is the difference between  independent and mutually  exclusive projects? Independent projects – if the cash  flows of one are unaffected by the  acceptance of the other. Mutually exclusive projects – if the  cash flows of one can be adversely  impacted by the acceptance of the  other.
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    11-5 What is the difference between normal  and nonnormal cash flow streams? Normal cash flow stream – Cost (negative  CF) followed by a series of positive cash  inflows.  One change of signs. Nonnormal cash flow stream – Two or  more changes of signs.  Most common:   Cost (negative CF), then string of positive  CFs, then cost to close project.  Nuclear  power plant, strip mine, etc.
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    11-6 FLOW Year Project L Project S 0 (100) (100) 1 10 70 2 60 50 3 80 20
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This note was uploaded on 04/09/2008 for the course BADM 310 taught by Professor O'brien during the Spring '08 term at SD State.

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Chapter 11 - CHAPTER 11 The Basics of Capital Budgeting...

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