Bu320p.11 - Chapter 11 Basics of Capital Budgeting Capital...

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Chapter 11         Basics of Capital Budgeting Capital Budgeting:  Planning expenditures for assets whose cash flows extend           beyond one year.             Project S    Project L         Year    Cash Flows       Cash Flows           0 -$1,000           -$1,000 1             500                 100 2             400                 300 3             300                 400 4             100                 600 Note: 1.  Assume all cash flows occur at end-of-year. 2. Assume the cost of capital is 10%. A. Payback Method – calculates number of years to recover initial cost.    Cumulative  For Project S: Year    Cash Flows 1    500 2    900 3 1,200 4 1,300 Payback S  =  2 + 100/300 =  2.33 years Payback L  =   3.33 years B. Net Present Value Method
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For Project S: 1,  , P/YR 10, I/YR
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