MGMT310_lecture17 - Last Lasttimewediscussed Capital CapitalBudgeting Shouldthefirm Buildanewplant Replacementprojects Replaceamachine(

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
st time we discussed… Last time we discussed…
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
apital Budgeting Capital Budgeting Firm has many different investment alternatives for allocating capital Should the firm … Build a new plant Replace a machine Replacement projects st reduction or revenue maintenance projects Upgrade equipment Build a new plant Launch a new product (cost reduction or revenue maintenance projects) xpansion projects (revenue expansion) p Start an advertising campaign Acquire another firm Expansion projects (revenue expansion) **forecasting cash flows more difficult for this type
Background image of page 2
ages in capital budgeting Stages in capital budgeting 1. Project development and classification We will assume this part has already been done. 2. Estimation of cash flows Initial Investment [I ] 0 Operating Cash Flows [C t ] Termination Cash Flows [C T ] . roject risk assessment 3. Project risk assessment 4. Make a decision to accept/reject based on the above! … but how do we make this decision??
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
ecision criteria Decision criteria Once we have an estimate of cash flows (and assessed risk thereof), we need a way to use this information to make a decision Four common criteria for decision making (acceptvsreject) Net present value analysis Pay back period (& discounted payback) Profitability Index y Internal Rate of Return eep in mind we’ll also need a way to rank our projects in case Keep in mind, we ll also need a way to rank our projects in case… Our projects are mutually exclusive (i.e., investing in one, excludes or precludes the other) e nnot ise nough pital ke l od rojects We cannot raise enough capital to take all good projects
Background image of page 4
et present value Net present value Net Present Value (NPV) = PV( Cash Inflows )–PV( Cash Outflows ) NPV Rule: Accept if NPV > 0
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
PV: simple example NPV: simple example Let I = ($100) occ = 10% 0 C 1 = $100
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/31/2011 for the course MGMT 310 taught by Professor Matthewjamesbarcaskey during the Spring '08 term at Purdue University-West Lafayette.

Page1 / 22

MGMT310_lecture17 - Last Lasttimewediscussed Capital CapitalBudgeting Shouldthefirm Buildanewplant Replacementprojects Replaceamachine(

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online