Chapter 11 Powerpoint

Chapter 11 Powerpoint - CHAPTER 11 The Basics of Capital...

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CHAPTER 11 The Basics of Capital Budgeting
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C a p i t a l B u d g e t i n g F I N 3 4 0 3 - B u s i n e s s F i n a n c e B a s i c s O t h e r T o p i c s I n t e r n a l R a t e o f R e t u r n P a y b a c k N e t P r e s e n t V a l u e P r o f i t a b i l i t y I n d e x N P V P r o f i l e s N P V v e r s u s I R R M e t h o d s
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Capital Budgeting Capital budgeting is how the firm determines what additions it should make to its fixed assets. Involves long-term decisions. Involves large expenditures. Critical to the survival of the firm.
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Capital Budgeting Classifications Replacement Maintenance Cost Reduction Expansion Existing Product/Markets New Products/Markets Safety/Environmental Projects Other Projects
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Capital Budgeting Procedures Estimate cash inflows/outflows. Assess riskiness of the cash flows and determine r (WACC on a risk-adjusted basis) Find NPV and/or IRR Accept if NPV > 0 and/or IRR >
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Capital Budgeting: Cash Flows Project A Project B Year Cash Flow Cash Flow 0 -$100.00 -$100.00 1 $10.00 $50.00 2 $30.00 $60.00 3 $60.00 $30.00 4 $80.00 $20.00 Total $180.00 $160.00
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Payback Period Number of Years to recover the initial cost of the investment: PB A $100 = $10 + $30 + $60 PB A = 3 years PB B $100 = $50 + ($60)(5/6) PB B = 1 + 5/6 years = 1.83 years
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PVPB A = 3.30 years ($17.39/$58.80) PVPB B = 2.09 years ($ 2.26/$23.81) Present Value Payback Project A
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Chapter 11 Powerpoint - CHAPTER 11 The Basics of Capital...

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