Lecture 5_Student_6slides

Lecture 5_Student_6slides - Reminder FIN 221 Lecture 5 CH10...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 FIN 221 Lecture 5 CH10 Fundamentals of Capital Budgeting 2 • No classes next week – Recess week • No classes in Week 6 – School of Accounting and Finance reading week • Mid-Session Exam to be held on Saturday, 17 th April • Materials covered in Lectures 1-4 will be examinable. • 40 Multiple Choice Questions (100 min) • Formula sheet will be provided. • YOU NEED TO USE A PENCIL to fill in Multiple choice question answer sheet. Reminder 3 Mid-Exam Locations • Batesman Bay: Seminar Room 1 • Bega: Room 3 • Loftus: G06 • Moss Vale: T1 • Shoalhaven: UG04 • Wollongong: Uni Hall 4 Relevant Reading Chapters • 10.1 Importance of capital budgeting Classification of investment projects Independent projects Mutually exclusive projects Basic Capital Budgeting Terms • 10.2 • 10.3 • 10.4 • 10.5 When IRR and NPV methods agree When NPV and IRR method disagree IRR vs NPV: A Final comment • 10.6 5 Cash Flow Cash Flow Cash Flow PV PV PV (1+i) n R (1+k) n Cost of capital 6 Mutually exclusive vs independent • Critical to make an optimal investment decision • Objective: To select investments in real assets that will increase the value of the firm • Q: How do you know whether the investment will create value or not? • We need some tools and techniques. • Mutually exclusive project – A set of projects where only one can be accepted • Independent projects – Projects whose cash flows are not affected by the acceptance or non-acceptance of other projects Capital Budgeting
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 7 Basic Capital Budgeting Terms • Cost of capital (k) – the minimum return that a capital budgeting project must earn for it to be accepted – Opportunity cost since k reflects the rate of return investors can earn on financial assets of similar risk • Capital rationing – A situation where a firm does not have enough capital to invest in all attractive projects and must therefore ration capital 8 Net Present Value 20 + 30 + 70 (1+ k ) 1 (1+ k ) 2 (1+ k ) 3 = - PV(COST) + PV(Future CFs) • Uses discounted CFs valuation technique to adjust for time value of money • NPV represents the “$increase in the value of firm”
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/16/2010 for the course COMMERCE f221 taught by Professor Ala during the Spring '10 term at Uni. West.

Page1 / 6

Lecture 5_Student_6slides - Reminder FIN 221 Lecture 5 CH10...

This preview shows document pages 1 - 3. Sign up to view the full document.

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