Chapter9 - Financial Management FINE 301-01/-02 Spring 2008...

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Financial Management FINE 301-01/-02 Spring 2008 C HAPTER 9: Project Analysis Capital Budgeting Process Capital Budget - list of planned investment projects Develop and rank all investment projects Authorize projects to maximize firm value Common projects categories: Outlays required by law or company policy Maintenance or cost reduction Capacity expansion in existing business Investment for new products Potential Problems Inconsistent economic forecasts Conflicts of interest Bias in project estimates Other considerations may include: Limits on investment capital Competitive advantage Market conditions Project Selection Sensitivity Analysis Analysis of individual variables’ effect on project NPV. Scenario Analysis Project analysis given a particular combination of assumptions. Simulation Analysis Probability analysis of success over a range of outcomes. Break Even Analysis Analysis of the level of sales at which the project covers its costs.
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Sensitivity Analysis Example A supermarket chain is considering building a new superstore. The expected revenues and costs are contained in the following table. Depreciation is straight-line over 12 years, the firm is in the 40% tax bracket, and the opportunity cost of capital is 8%.
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Chapter9 - Financial Management FINE 301-01/-02 Spring 2008...

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