05%20capital%20budgeting%20criteria

05%20capital%20budgeting%20criteria - geting criteria - 1...

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dgeting criteria - 1 FNAN 301 Financial Management Capital budgeting criteria
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dgeting criteria - 2 Topics Covered Overview of capital budgeting Evaluating capital budgeting opportunities Net present value (NPV) Internal rate of return (IRR) Payback period Discounted payback period Accounting rate of return
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dgeting criteria - 3 Overview of Capital Budgeting Patriot Theaters owns and operates 145 movie theaters in the Mid-Atlantic Region The firm’s managers think that expanding into New England may be a good move for the company The managers will conduct capital budgeting analysis to help them decide whether or not to expand
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dgeting criteria - 4 Overview of Capital Budgeting Capital budgeting is the process whereby a firm decides how it is going to spend money on projects Examples of potential projects include Buying or building a factory to increase production of an existing product Opening stores in a new region Buying equipment to be used to offer a new product or service or to offer an existing product or service in a new geographic area
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dgeting criteria - 5 Overview of Capital Budgeting Projects involve two types of expected cash flows Investment-related expected cash flows These are the expected cash flows associated with making the investment in the project and are often associated with buying, building, etc. Almost always negative Project-related expected cash flows These are the expected cash flows produced by the project Can be negative, zero, or positive
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dgeting criteria - 6 Overview of Capital Budgeting A project with conventional cash flows involves An initial negative investment-related expected cash flow • C 0 < 0 Reflects the cost of the investment Is the only cash flow associated with the investment • Investment = -C 0 Is the only negative expected cash flow associated with the project Subsequent non-negative project-related expected cash flows with at least one positive • C 1 ≥ 0, C 2 ≥ 0, …, C t ≥ 0, with at least one positive expected cash flow Can continue for a finite or infinite length of time Reflect the expected cash flows produced by the project Present value of these expected cash flows reflect the value of what is created by the project A project with non-conventional cash flows involves any pattern that is not conventional Key cases: has C 0 ≥ 0 and/or a negative expected cash flow at
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dgeting criteria - 7 FNAN 301 Notes Assume that a project with a negative expected cash flow at time zero followed by expected cash flows that are either positive or zero with at least one positive expected cash flow after time zero should be assumed to have conventional cash flows
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dgeting criteria - 8 FNAN 301 Notes The projects that will be quantitatively evaluated in this course with NPV may not all have conventional cash flows The projects that will be quantitatively evaluated in this course with a method other than NPV that is
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.

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05%20capital%20budgeting%20criteria - geting criteria - 1...

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