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Chapter 12 Part 1 notes

# Chapter 12 Part 1 notes - Chapter12Part1 CapitalBudgeting...

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1 Chapter 12 Part 1 Capital Budgeting:  Decision Criteria

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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. __________ decisions; involve large  expenditures. Very important to firm’s future.

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4 Steps in Capital Budgeting Estimate cash flows (inflows &  outflows). Assess _____ of cash flows. Determine r = ______ for project. Evaluate cash flows.
5 Independent versus Mutually  Exclusive Projects Projects are: ____________, if the cash flows of one are  unaffected by the acceptance of the other. _________________, if the cash flows of  one can be adversely impacted by the  acceptance of the other.

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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 =   Σ N t = 0 CF t (1 + r) t NPV =   Σ N t = 1 CF t (1 + r) t - CF 0

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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/YR = 18.78 = NPV L

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10 Rationale for the NPV Method NPV =  PV inflows – Cost  This is net gain in wealth, so accept  project if NPV _____.
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