Chapter 9 Notes

Chapter 9 Notes - thapter 9: Capital Budgeting Techniques...

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thapter 9: Capital Budgeting Techniques (1/2) Assignments: a. ST-1 (only a, b and i ) on page 381 b. #9-1,2,8 on page 382- 383 due on Tuesday (1U13/2008) No class on 11/11 (Veterans'Day) 1. What is Capital Budgeting? Terms Caoital: fixed assets used Budget: aplgr that details C,:.1>,\''-\ -- F'r'.'\ A" "---F) rr-.r\ 1. | . f, -1 i:r.rr. a,,1 , i.r.^,,. .. i:\,--, v-r * . .\,<. ...r. { _,< =,,.i_"t,":,1.- -,!,- \ _,. ;, i4 production, such as ryhinery, facjgry, etc. proiejted inflows qd q"tfu (:t .:-- a \ .- -.'\ t- Definition of capital Budgeting : Analysis of projects and decision which are acceptable investments (in fixed assets) and which a"e4ly rlql-d dpur]f,i_sec! Our focus is on Acceptability and Ranking (pref-erence) of projects (investments) Project Classification a. Mutually exclgsive proiects (or mutually exclusive investment decision) Suppose there are two projects. ( tgling ?lg prqect means that you cannot take the other, then t$e pjoJecls are said to be mutually elclusive. b. Independent proiec.ts (or independent investment decision) ther words, if the or reject the rtlgr, Another project classification: Expansiqn vs_. replacemgnt ) Not your interest! And Meanings are also obvious. Four Capital Budgeting Evaluation Techniques : a*-ru-.-+\ vy\<-,'\ I .i.e ,-\ 5 , c,\) l) Payback period method 2) Discounted payback period method 3) Net present value method, NPV 4) lnternal rate of return, IRR 4-+*eAfie+nn@
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Payback period: lr"le"pnh qf time ft" ogllulgost oJan ry$nten! [email protected] the exglted ggshflows. Ti*<- \o ;edvr{-. lr\.- ini F,'o,\ ro.,}. Project Acccpt/Reject Decision: A project is considered acceptable S its payback iS tgr, tl1gt nn the Project preference: A project which has less payl4ck pgioct rj prefened. \.J Exafrle: [email protected]" the time line is Chapter ll). rA)L€= j\6pr s-\ ca"h called cost of capital (or --- WAC!, I/"i&d Average of Cost of Qpilal, <Project S> 0 r=l0%o I 2 3 4 c c',\ , l------------------l------------------l--- -l------------------l Net CF : vuc-F-$-*3,000 1,500 l,2}o 800 300 C9o CF r CF. LQ t C.Y.1 (".','." ,.) 4." \) C*.,.t, \6-\';-<- slgP: -!Pt)o - \1; o L) R4.,,'t-;'-\'- [r, / ,, ... \c ., !). . .,- ,_ (, -'i;Co Soc tr,'c. L_\ c).=it:,- \,/ri \ .' -.- i y:, 2 -=-.- <' -./ I ) ( -r. 2
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This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State.

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Chapter 9 Notes - thapter 9: Capital Budgeting Techniques...

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