Chapter 9. Cap budgeting - Strategy and analysis

Chapter 9. Cap budgeting - Strategy and analysis - Capital...

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Capital Budgeting - Strategy and Analysis Chapter 9 Finance 357
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Cash Flow Uncertainty In the problems to this point, cash flows have been certain. Tables of cash flows told you when the cash flow would come and how much it would be. Not very similar to life in the real world. In the real world, cash flows aren’t always certain and decision makes much take the uncertainty into account. We must have some tools to deal with the uncertainty.
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Decision Trees Decision Trees are used to sort through the variety of decisions that are usually involved with NPV project analysis.
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Sensitivity Analysis Many times during project planning, NPV values are calculated down to the dollar for each year, but in reality, projects rarely reach the planned numbers. A tool is needed to give managers a way to determine how closely actual numbers will be to the planned numbers. Sensitivity Analysis examines how sensitive a particular NPV calculation is to changes in the underlying assumptions of the project.
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Using Sensitivity Analysis We work for a jet engine manufacturer who is projecting that it will sell 3,000 plane engines next year. We must decide if this is a reasonable sales estimate. Based on this breakdown, we see that market share, size of the jet engine market and the price per engine are the key variables.
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Costs – Fixed vs. Variable We can now build a table of cases
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Chapter 9. Cap budgeting - Strategy and analysis - Capital...

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