BCOR 2200 Chapter 8 w cq

BCOR 2200 Chapter 8 w cq - 1 Chapter 8 Net Present Value...

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Unformatted text preview: 1 Chapter 8 Net Present Value & Other Investment Criteria 2 Were starting a new section of the Course: Section 1 Overview Ch 1: Intro Section 2 Financial Statements and CFs Ch 2: Financial Statements and CF definitions Ch 3: Ratios Section 3 Valuation of future CFs Ch 4: Intro to TVM (Single CFs) Ch 5: More TVM (Multiple CFs) Section 4 Stocks and Bonds Ch 6: Bonds Ch 7: Stocks Section 5 Capital Budgeting Ch 8: NPV and other Decision Criteria Ch 9: Making Cap Budgeting Decisions Calc CFs 3 Capital Budgeting is Budgeting the firms capital Spending the big money Not small, short-term money The light bill, salaries, office supplies But BIG , long-term money These are called Capital Expenditures So if a firms sells stocks, sells bonds, retains earnings What does it do with the money? 4 Heres the idea: The CAPITAL BUDGETING DECISION is about ADDING VALUE to the firm To pay for capital investments, a firm can sell stocks, sell bonds or retain earnings But SHOULD a firm sell stocks, sell bonds or retain earnings? Does it have something WORTHWILE to do with the money? Does it have GOOD CAPITAL PROJECTS ? Does the proposed project ADD VALUE ? If the proposed project does not add value Then DONT sell stocks, DONT sell bonds, DONT retain earnings Instead the firm should PAY DIVIDENS 5 Net Present Value So how do we know if a proposed project Adds Value ? We calculate the proposed projects Net Present Value Called NPV Heres how NPV analysis works: The decision rule: If the Net Present Value is POSITIVE Then the project Adds Value So the company should Invest the Capital ( or Budget the Capital) 6 Net Present Value is 1. The PV of all the projects future cash flows CF 1 , CF 2 , CF 3 , 2. Discounted at the Proper discount rate (R) A higher discount rate for riskier projects A lower discount rate for less risky projects 3. Plus the initial (time 0) cash flow... CF 0 is the Initial Cost of the project CF is usually an outflow, so it is usually negative If the PV of the future CFs is greater than the cost: Then the NPV > 0 and the project Adds Value! 1. If the company can Spend $100 today 2. For something Worth $110 (in PV terms so also today) 3. The do the project! 7 How to think about NPV Think about paying $1,000 today for something A bond, an annuity, a truck, a machine Assume that something will pay a net of $400 per year for the next 3 years Also assume the proper discount rate is 10% So pay $1,000 now for $400 at time 1, 2 and 3....
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This note was uploaded on 12/06/2010 for the course BCOR 2200 at Colorado.

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BCOR 2200 Chapter 8 w cq - 1 Chapter 8 Net Present Value...

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