EFN406 Lecture 05 2009

EFN406 Lecture 05 2009 - Click to edit Master subtitle...

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Unformatted text preview: Click to edit Master subtitle style 2009 EFN406 Managerial Finance EFN406 Managerial Finance Topic 5 Capital Budgeting Applications 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 22 Learning Objectives On completing this topic students should be able to: Understand the principles used to project future cash flows Understand relevant cash flows Distinguish between Investment and financing cash flows Understand the principle of consistency Compare mutually exclusive projects with unequal lives Work out when to replace, retire or abandon assets Adjust cash flows for inflation Do NPV with capital rationing 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 33 Outline Review of Investment Evaluation Techniques Relevant Cash Flows Replacement Retirement Optimal Life Inflation and Project Evaluation Capital Rationing 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 44 Required Reading PBEHP Chapter 6 Read and study all parts of sections 6.1 to 6.4 Read section 6.5.1 on sensitivity analysis Read and study sections 6.7 and 6.8 Read lightly the rest of chapter six. 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 55 Methods of Evaluation Discounted Cash Flows Common methods NPV Net Present Value AE Annual Equivalents IRR Internal Rate of Return Present Value Index 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 66 Relevant Cash Flows Current and Future Cash Flows Exclude Financing Charges (Interest & Repayments) Incremental Cash Flows Exclude Sunk Costs Be Wary of Allocated Costs Look Out for Opportunity Costs and Benefits Terminal or Residual Values Taxation and Inflation Working Capital 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 77 Discounted Cash Flow Methods Uses cash flows or market values, not accounting values Considers timing of cash flows by using present values Indicate the increase in value of the company from undertaking the investment Easy to adjust for Systematic Risk 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 88 Analysing Investment Decisions Concerned only with those factors that make a difference Costs: the initial outlays as well as all operating costs Benefits The timing of these costs and benefits Those that differ between alternatives That change because of the decision Recognise genuine interdependencies Use cash flows and market values Opportunity costs and benefits 2009 EFN406 Managerial Finance 2009 EFN406 Managerial Finance 99 Estimating Relevant Cash Flows...
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EFN406 Lecture 05 2009 - Click to edit Master subtitle...

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