{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# Ch 11 - Chapter11 TheBasicsofCapital Budgeting...

This preview shows pages 1–18. Sign up to view the full content.

1 Chapter 11 The Basics of Capital  Budgeting:  Evaluating Cash Flows

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

View Full Document
2 Topics Overview and “vocabulary” Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life
3 What is capital budgeting? Analysis of potential projects. Long-term decisions; involve large  expenditures. Very important to firm’s future.

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

View Full Document
4 Steps in Capital Budgeting Estimate cash flows (inflows &  outflows). Assess risk of cash flows. Determine r = WACC for project. Evaluate cash flows.
5 Independent versus Mutually  Exclusive Projects Projects are: independent, if the cash flows of one are  unaffected by the acceptance of the other. mutually exclusive, if the cash flows of one  can be adversely impacted by the  acceptance of the other.

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

View Full Document
6 Cash Flows for Franchise L  and Franchise S 10 80 60 0 1 2 3 10% L’s CFs: -100.00 70 20 50 0 1 2 3 10% S’s CFs: -100.00
7 NPV: Sum of the PVs of all  cash flows. Cost often is CF 0 and is negative. NPV = n t = 0 CF t (1 + r) t . NPV = n t = 1 CF t (1 + r) t . - CF 0 .

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

View Full Document
8 What’s Franchise L’s NPV? 10 80 60 0 1 2 3 10% L’s CFs: -100.00 9.09 49.59 60.11 18.79 = NPV L NPV S = \$19.98.
9 Calculator Solution: Enter  values in CFLO register for L. -100 10 60 80 10 CF 0 CF 1 NPV CF 2 CF 3 I = 18.78 = NPV L

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

View Full Document
10 Rationale for the NPV Method NPV =  PV inflows – Cost  This is net gain in wealth, so accept  project if NPV > 0. Choose between mutually exclusive  projects on basis of higher NPV.  Adds  most value.
11 Using NPV method, which  franchise(s) should be accepted? If Franchise S and L are mutually  exclusive, accept S because NPV s  >  NPV L  . If S & L are independent, accept both;  NPV > 0.

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

View Full Document
12 Internal Rate of Return:  IRR 0 1 2 3 CF 0 CF 1 CF 2 CF 3 Cost Inflows IRR is the discount rate that forces PV inflows = cost. This is the same as forcing NPV = 0.
13 NPV:  Enter r, solve for NPV. IRR: Enter NPV = 0, solve for IRR. = NPV n t = 0 CF t (1 + r) t . = 0 n t = 0 CF t (1 + IRR) t .

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

View Full Document
14 What’s Franchise L’s IRR? 10 80 60 0 1 2 3 IRR = ? -100.00 PV 3 PV 2 PV 1 0 = NPV Enter CFs in CFLO, then press IRR: IRR L = 18.13%. IRR S = 23.56%.
15 40 40 40 0 1 2 3 -100 Or, with CFLO, enter CFs and press IRR = 9.70%. 3 -100 40 0 9.70% N I/YR PV PMT FV INPUTS OUTPUT Find IRR if CFs are constant:

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

View Full Document
16 Rationale for the IRR Method If IRR > WACC, then the project’s rate  of return is greater than its cost-- some  return is left over to boost stockholders’  returns. Example: WACC = 10%, IRR = 15%. So this project adds extra return to  shareholders.
17 Decisions on  Projects S and  L per IRR If S and L are independent, accept both:   IRR S  > r and IRR L  > r.

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

View Full Document
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