FI.Chapter12 - eash FF*si, Hsa*scs*ti+s"d amd...

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Unformatted text preview: eash FF*si, Hsa*scs*ti+s"d amd F?iek &r;*!r?.6,Eii ome Depot Inc. grew phenoncn .rlly dt'rnrg the 1990s, and ii is still grol{'ing rapidlv At thc tJeginning of 1990, it irad 118 stores and annual s.rles of $78 brllron. T, ro\ (nid-'00',r h,- rt.ur. lhan 2,065 stores and sales of more than $84 brll,r, Th, .lo,l r.r, al-o penormed,lurr, \+ll-. $10,000 In!e-tmenl in loo0 \,,,,1d ro! bL \,.rrh dbo,.r $r2- 200, {u' .i, .'i,Ilu,,l rclurn of more than 177.1 f"r ,r ryp,cdl nc\ .torP. llomF D,t,,l .perl- ., ,.urd (20 mrllron lo fur.h,r., lard, consiruct a new store, and sbck it t\ill -\cntor). fdch nFh ..oru rl,u. .et r. scnts a lnajor capital expenditure, so thc- |np.,f) n,J.r ,,{ ,.rprt.rl h dBeli d .rrl 1.luF. I'r d-lr rrrne rt a pu,r'nlinl .'ur( . e l(ilfd ..,.r, flo\'. "rF.Jfti.i,nt ,', LJ,"l .,,,,-r.. Hnme Dep,,r u.(. rfu.rrjlro fNm its existing stores io Iorecast new $ores'expccicd cash f]olvs. Thlrs far its lJrr..r.r. l,.r\c bcer' our-rnnding. h.I rh. '. are al" ry- rr.k- lhdr mu.. b, .,,n.ioere. |irs!, sales miSht be less ihan projecte.:t rr thc cconony wcakcns. Second, some ot llome llcpot's customers might in ihe flrtlrrc bypass i! aliogether and bu)' direcllv from nlanufnctrrers through the Internet or lron cdnpetitors such as Lo$-e's. Third, nerv stores colLlcl iake sales a -av from rxistinS storcs, or "caN1ibalize" thm. To broadcn iis customer base from do-it- l,orrself cuslorers and professional con' lractors,llome Depot also operates its Expo Dosign Center cha , i{hich provictes deco ratir\g nLlvice, niicrials, and insiallation for Driddlc- and uppcr ircome customers. l'ho dccision to expand requircs a .lctailed asscssmcnt o[ the forccasicd cash florvs, incltl.lnr8 the dsk that the forecasted level of salcs rnight rot bc rcalized. In this chapter, wc .lescribc techniques for estimating a projcct's cash flot{'s and their associated risk. As you ra(t this .hapter, think about how Fblne Depot might use ihese technic:lues to evaloaie its capital budgeting decisions. d;, r) 6 12 416 Cosh Flow Estimolo. ond Risk Ano ysls Tho trasic princiFrles of cnpit.rl budBeting \{cre covcrcd in Chaptcr 11. Civcn a projcd's erpcctcd cash flows, it js casy k) calclllate its NPV IRIi, MIRR, Pl, prr' ba.k, iind discounted pa),bnck. Unforiun.tel),, cash fl(^{s are r.rcl), just givor- rathcr nun.grrs musi esiinate ihem basd on inlomation collectcd from so!(cs both inside anll ol(side ihc companr Mofeovcr, Lurcertainty srrrc ncls thc cash flou, cstimaks, nn(t somc prciecis arc riskier than oLhcft. ln the first part of lllrs chnptL'r rve dcvolop proccdures lor cstinating ihc'crsh flor!'s associated wjllr cirp. ital budsetnrg prciects. Then, in the sccond part, l\c discuss techniques Lrsrd io nroasrrre and inkc iccount (,f project risk....
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FI.Chapter12 - eash FF*si, Hsa*scs*ti+s"d amd...

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