FIN 100 Week 6

FIN 100 Week 6 - FIN 100 Week 6, Part 1: The Basics of...

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FIN 100 Week 6, Part 1: The Basics of Capital Budgeting Slide # Topic Narration 1 Introduction Welcome to Principles of Finance. In this lesson, we will discuss capital budgeting. Please go to slide number 2. 2 Objectives When you complete this lesson, you will be able to: Explain the formulation of a business investment plan using the five stages of capital budgeting. Calculate the market value and the net benefit of an investment. Calculate the profitability index of a company. And calculate the payback period for a company. Please go to slide number 3. 3 Overview of Capital Budgeting Capital budgeting is the process of identifying, evaluating, and implementing a company’s investment opportunities. The profitability of a firm is affected by the success of a firm to budget its funds carefully and to keep a watchful eye on fixed assets. Fixed-asset management requires financial managers to compare capital expenditures against the cash flow benefits that will be received from these benefits over several years. When the benefits exceed the expenditures, the firm’s value will increase. Capital budgeting decisions can involve mutually exclusive or independent projects. Mutually exclusive projects mean that selecting one project precludes others from being undertaken. On the other hand, independent projects are not in direct competition with one another. Please go to slide number 4. 4 Capital Budgeting Terms Before we begin discussing the capital budgeting process, we need to define some key terms that will help in understanding this topic. First is the market value of an investment . This is the present value of future cash flows to be received by the investment. Second is the net benefit . Also called the net present value , this
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is the present value of a project’s cash flows minus its costs. The equation for net present value is shown here. For example, suppose that the present value of a project’s cash flows is one-hundred dollars, and we will need to pay eighty dollars for this project. The net present value is twenty dollars. To maximize shareholder wealth, we need to find assets or projects that have positive net present values, as in this example. Please go to slide number 5. 5 The Capital Budgeting Process The capital budgeting process consists of the five stages listed on this slide. In the identification stage, potential capital investment opportunities are located. Also, we identify whether a project involves a replacement decision and/or additional financing. The development stage requires estimating relevant cash inflows and outflows. It also involves discussing the pros and cons of each project. The selection stage involves applying the appropriate capital budgeting techniques to determine the financial feasibility of the project, which helps in deciding whether a project should be accepted or rejected. In the
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This note was uploaded on 06/22/2008 for the course FIN 100 taught by Professor Jones during the Spring '07 term at Strayer.

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FIN 100 Week 6 - FIN 100 Week 6, Part 1: The Basics of...

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