1.13.1 Week%206%20lecture%202%20Capital%20Project%20Decision%20Rules%20rev

1.13.1 Week%206%20lecture%202%20Capital%20Project%20Decision%20Rules%20rev

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    Capital Project Decisions Week 6 Lecture 2
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    Basic Valuation - again From the time value of money we realize that the  value of anything is based on the present value  of the cash flows the asset is expected to  produce in the future
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    Valuation of Real (Tangible) Assets Valuation is still based on expected cash flows  of the asset Capital Budgeting
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    Valuation of Real (Tangible) Assets       Year            Expected Cash Flow, CF        1 $120,000        2   100,000        3   150,000        4             80,000        5     50,000 To earn a 14% return on investments like this, what is the value of this machine?
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    Cash Flow Time Lines
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    0 1 2 3 4 5 14% $120,000 $100,000 $150,000 $80,000 $50,000 PV of $120,000 PV of $100,000 PV of $150,000 PV of $80,000 PF of $50,000 Asset Value = V 0 ( 29 ( 29 ( 29 ( 29 ( 29 5 4 3 2 1 14 1 000 50 14 1 000 80 14 1 000 150 14 1 000 100 14 1 000 120 790 356 . , $ . , $ . , $ . , $ . , $ , $ + + + + = Cash Flow Time Lines
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    Capital Budgeting The process of planning investments in assets  whose cash flows are expected to extend  beyond one year
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    Capital Budgeting Evaluation  Techniques 1. Payback 2. Net present value (NPV) 3. Discounted Payback 4. Internal rate of return (IRR) 5. Modified Internal rate of return (MIRR)
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    Payback Method Payback Period  - Time until _________ recover the  _____________ of the project. The  payback rule  specifies that a project be accepted if  its _______________________ ___________________.    The following example will demonstrate the __________  of this method.
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    Payback Method Payback Period  - Time until cash flows recover the initial  investment of the project. The  payback rule  specifies that a project be accepted if  its payback period is less than the specified cutoff  period.  The following example will demonstrate the  absurdity of this method.
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    Example The three projects below are available.  The company accepts  all projects with a 2 year or less payback period.   Cash Flows
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This note was uploaded on 12/23/2009 for the course BCOM FINC 201 taught by Professor Debrak.reed during the Spring '09 term at Canterbury.

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1.13.1 Week%206%20lecture%202%20Capital%20Project%20Decision%20Rules%20rev

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