Chap13_2009 - Chapter 13 Capital Budgeting Techniques...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 13 Capital Budgeting Techniques
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Learning Objectives After studying Chapter 13, you should be able to: Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability. Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and profitability index (PI). Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. Define, construct, and interpret a graph called an “NPV profile.” Understand why ranking project proposals on the basis of IRR, NPV, and PI methods “may” lead to conflicts in ranking. Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or PI rankings. Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis. Explain the role and process of project monitoring, including “progress reviews” and “post-completion audits.”
Background image of page 2
– Project Evaluation and Selection – Potential Difficulties – Capital Rationing – Project Monitoring – Post-Completion Audit Topics
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Project Evaluation: Alternative Methods – Payback Period (PBP) – Internal Rate of Return (IRR) – Net Present Value (NPV) – Profitability Index (PI)
Background image of page 4
Proposed Project Data Julie Miller is evaluating a new project for her firm, Basket Wonders (BW) . She has determined that the after-tax cash flows for the project will be $10,000; $12,000; $15,000; $10,000; and $7,000, respectively, for each of the Years 1 through 5 . The initial cash outlay will be $40,000 .
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Independent Project • Independent -- A project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration. For this project, assume that it is independent of any other potential projects that Basket Wonders may undertake.
Background image of page 6
Payback Period (PBP) PBP is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow. 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
(c) 10 K 22 K 37 K 47 K 54 K Payback Solution (#1) PBP = a + ( b - c ) / d = 3 + ( 40 - 37 ) / 10 = 3 + ( 3 ) / 10 = 3.3 Years 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K Cumulative Inflows (a) ( -b ) (d)
Background image of page 8
Payback Solution (#2) PBP = 3 + ( 3K ) / 10K = 3.3 Years Note: Take absolute value of last negative cumulative cash flow value. Cumulative Cash Flows -40 K 10 K 12 K 15 K 10 K 7 K 0 1 2 3 4 5 -40 K -30 K -18 K -3 K 7 K 14 K
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Yes! The firm will receive back the initial cash outlay in less than 3.5 years. [ 3.3 Years < 3.5 Year Max . ] The management of Basket Wonders has set a maximum PBP of 3.5 years for projects of this type. Should this project be accepted?
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/06/2009 for the course BUS BAM314 taught by Professor Na during the Spring '09 term at 東京大学.

Page1 / 51

Chap13_2009 - Chapter 13 Capital Budgeting Techniques...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online