Chapter_11-Capital_Budgeting

Chapter_11-Capital_Budgeting - CHAPTER11 CapitalBudgeting...

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11-1 Click to edit Master subtitle style CHAPTER 11 Capital Budgeting Should we build this plant?
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11-2 What is capital budgeting? n Process of identifying & selecting  investments in long-lived assets,  (assets that can generate benefits  over more than a year). n Analysis of potential additions to fixed  assets. n Long-term decisions; involve large 
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11-3 Why do we need capital  budgeting? 1) Outlay of capital (initial investment)  - immediately. 2) Benefits/return on investment  - only after completed / over a no. of          years.
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11-4 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.
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11-5 What is the difference between  independent and mutually  n Independent projects  – if the cash flows of one are    unaffected by the acceptance of the  other. n Mutually exclusive projects  – if the cash flows of one can be  adversely impacted by the acceptance 
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11-6 Capital budgeting techniques 1) Net Present Value (NPV) 2) Internal Rate of Return (IRR) 3) Modified Internal Rate of Return       (MIRR) 4) Payback Period 5) Discount Payback Period
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