DFI 102 CAPITAL BUDGETING

DFI 102 CAPITAL BUDGETING - Capital Budgeting DFI 202 1...

Info icon This preview shows pages 1–12. Sign up to view the full content.

Capital Budgeting DFI 202 1 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Outline Introduction Net Present Value (NPV) Payback Period Rule (PP) Discounted Payback Period Rule Average Accounting Return (AAR) Internal Rate of Return Rule (IRR) Profitability Index Rule (PI) Summary and Conclusions 2 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 2
Why Flows of funds and decisions important to the financial manager 3 Financial Manager Financial Markets Real Assets Financing Decision Investment Decision Returns from Investment Returns to Security Holders Reinvestment Refinancing Capital Budgeting is used to make the Investment Decision 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Introduction Capital Budgeting is the process of determining which real investment projects should be accepted and given an allocation of funds from the firm. To evaluate capital budgeting processes, their consistency with the goal of shareholder wealth maximization is of utmost importance. 4 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 4
Capital Budgeting Mutually Exclusive versus Independent Project Mutually Exclusive Projects: only ONE of several potential projects can be chosen, e.g. acquiring an accounting system. RANK all alternatives and select the best one. Independent Projects: accepting or rejecting one project does not affect the decision of the other projects. Must exceed a MINIMUM acceptance criteria. 5 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Why capital expenditure is important The have long-term consequences They are difficult to reverse The involve substantial outlays 6 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 6
Techniques Traditional Methods Discounted techniques methods 7 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Traditional techniques Traditional techniques: Do not take into consideration time value of money e.g payback period, Accounting Rate of Return 8 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 8
Discounted cash flow techniques Discounted cash flow techniques- any method of investment project evaluation and selection that adjusts cash flows over time for the time value of money. Eg NPV,PI ,IRR 9 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

10 The Net Present Value (NPV) Rule Net Present Value (NPV) = Total PV of future CF’s - Initial Investment Estimating NPV: 1. Estimate future cash flows: how much? and when? 2. Estimate discount rate 3. Estimate initial costs Minimum Acceptance Criteria: Accept if: NPV > 0 Ranking Criteria: Choose the highest NPV 10/27/14 DFI 202 Capital budgeting Decisions
Image of page 10
11 NPV - An Example Assume you have the following information on Project X: Initial outlay -$1,100 Required return = 10% Annual cash revenues and expenses are as follows: Year Revenues Expenses 1 $1,000 $500 2 2,000 1,300 3 2,200 2,700 4 2,600 1,400 Draw a time line and compute the NPV of project X.
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern