ch 11 Combined

# ch 11 Combined - Chapter 11 The Basics of Capital Budgeting...

This preview shows pages 1–9. Sign up to view the full content.

The Basics of Capital Budgeting Chapter 11 Obj100 Obj101 Obj102 Should we  build this plant? 111-1

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

View Full Document
What is capital budgeting? § Analysis of potential additions to fixed assets. § Long-term decisions; involve large  expenditures. § Very important to firm’s future. 211-2
Steps to Capital Budgeting 1. Estimate CFs (inflows & outflows). 2. Assess riskiness of CFs. 3. Determine the appropriate cost of capital. 4. Find NPV and/or IRR. 5. Accept if NPV > 0 and/or IRR > WACC. 311-3

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

View Full Document
What is the difference between  independent and mutually exclusive  § Independent projects – if the cash flows of  one are unaffected by the acceptance of the  other. § Mutually exclusive projects – if the cash flows  of one can be adversely impacted by the  acceptance of the other. 411-4
What is the difference between normal and  nonnormal cash flow streams? § Normal cash flow stream – Cost (negative  CF) followed by a series of positive cash  inflows.  One change of signs. § Nonnormal cash flow stream – 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, etc. 511-5

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

View Full Document
Net Present Value (NPV) § Sum of the PVs of all cash inflows and  outflows of a project: 611-6 = + = N 0 t t t )     1   ( CF   NPV
What is Project L’s NPV? NPVS = \$19.98 711-7 Year  CF t   PV of CF t   -100  -\$100  10  9.09  60  49.59  80      60.11       NPV L  =  \$  18.79

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

View Full Document
Solving for NPV: § Enter CFs into the calculator’s CFLO register. § CF0 = -100 § CF1 = 10 § CF2 = 60 § CF3 = 80 § Enter I/YR = 10, press NPV button to get  NPVL = \$18.78.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern