Lecture 15

Lecture 15 - FIN 311 Instructor Syed Walid Reza Lecture 15...

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FIN 311 Instructor: Syed Walid Reza Lecture 15 Spring 2016
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Today Capital Budgeting Chapter 9: Net Present Value and Other Investment Criteria 2
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Capital Budgeting The process of allocating or budgeting capital to the firm’s long-term investments Why important? Resources are scarce Efficient allocation is important for shareholder welfare Examples: Replacement of existing assets Taking on new projects Expansion 3
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Capital Budgeting Methods for Decision Making The Payback rule The Discounted Payback rule Net Present Value (NPV) Internal Rate of Return (IRR) The Profitability Index (PI) “Good” Decision Criteria Does the decision rule adjust for the time value of money? Does the decision rule adjust for risk? Does the decision rule provide information on whether we are creating value for the firm? 4
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The Payback Rule How long does it take to get the initial cost back in a nominal sense?
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