Capital+Budgeting - FINAN303 Principles of Finance Spring...

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FINAN303 Principles of Finance Spring 2016 Capital Budgeting 1. Having resolved the i a versus i f problem, we now look at the methods used to evaluate the Asset Investment Decision. a. Should a firm undertake a project? Does the project create wealth for the firm’s shareholders? 2. Methodologies employed: a. Net Present Value (NPV) b. Internal Rate of Return (IRR) c. Modified Internal Rate of Return (MIRR) d. Payback Period e. Discounted Payback Period 3. Recap: Asset Investment…What is it? In the context of a timeline, what does it look like? a. Types of asset investment: i. Replacement 1. Needed to continue operations 2. Cost reduction ii. Expansion (Product or Market) 1. Existing products or markets 2. New products or markets iii. Safety and Environmental iv. Mergers/Acquisition v. Others 4. Where to start… a. What two pieces of information do we, as managers, need? i. C ash Flows and a discount rate b. Four assumptions for now… i. We know the “appropriate” discount rate that applies to the asset investment decision. ii. How the asset is financed is irrelevant to the decision to undertake the investment. iii. We know the timing and cash flows relevant to the decision. iv. When comparing mutually exclusive projects, assume they have equal lives.
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