Capital Budgeting ppt

Capital Budgeting ppt - 6-1 CHAPTER 6 Capital Budgeting...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
6 - 1 Copyright © 1999 by The Dryden Press Should we build this plant? CHAPTER 6 Capital Budgeting Decision Criteria
Background image of page 1

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

View Full DocumentRight Arrow Icon
6 - 2 Copyright © 1999 by The Dryden Press What is capital budgeting? n Analysis of potential additions to fixed assets. n Long-term decisions; involve large expenditures. n Very important to firm’s future.
Background image of page 2
6 - 3 Copyright © 1999 by The Dryden Press Steps 1. 2. Assess riskiness of CFs. 3. Determine k = WACC for project. 4. Find NPV and/or IRR. 5. Accept if NPV > 0 and/or IRR > WACC.
Background image of page 3

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

View Full DocumentRight Arrow Icon
6 - 4 Copyright © 1999 by The Dryden Press An Example of Mutually Exclusive Projects BRIDGE vs. BOAT to get products across a river.
Background image of page 4
6 - 5 Copyright © 1999 by The Dryden Press Normal Cash Flow Project: Cost (negative CF) followed by a series of positive cash inflows. One change of signs. Nonnormal Cash Flow Project: Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine.
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 - 6 Copyright © 1999 by The Dryden Press Inflow (+) or Outflow (-) in Year 0 1 2 3 4 5 N NN - + + + + + N - + + + + - NN - - - + + + N + + + - - - N - + + - + - NN
Background image of page 6
6 - 7 Copyright © 1999 by The Dryden Press What is the payback period? The number of years required to recover a project’s cost, or how long does it take to get the business’s money back?
Background image of page 7

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

View Full DocumentRight Arrow Icon
6 - 8 Copyright © 1999 by The Dryden Press Payback for Project L (Long: Most CFs in out years) 15 120 90 0 1 2 3 -150 = CF t Cumulative -150 -135 -45 75 Payback L 2 + 45/120 = 2.375 years 0 150 2.4
Background image of page 8
6 - 9 Copyright © 1999 by The Dryden Press Project S (Short: CFs come quickly) 105 30 75 0 1 2 3 -150 CF t Cumulative -150 -45 30 60 Payback S 1 + 45/75 = 1.6 years 150 0 1.6 =
Background image of page 9

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

View Full DocumentRight Arrow Icon
6 - 10 Copyright © 1999 by The Dryden Press 15 120 90 0 1 2 3 CF t Cumulative -150 -136.36 -61.98 28.18 Discounted payback 2 + 61.98/90.16 = 2.7 yrs. Discounted Payback: Uses discounted rather than raw CFs. PVCF t -150 -150 10% 13.64 74.38 90.16 = Recover invest. + cap. costs in 2.7 yrs.
Background image of page 10
Copyright © 1999 by The Dryden Press ( 29 NPV CF k t n t t = + = 0 1 . NPV:
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 42

Capital Budgeting ppt - 6-1 CHAPTER 6 Capital Budgeting...

This preview shows document pages 1 - 12. Sign up to view the full document.

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