Chapter-11 - Chapter 11 The Basics of Capital Budgeting...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
The Basics of Capital Budgeting Chapter 11 Should we build this plant? 11-1 What is capital budgeting? ± Analysis of potential additions to fixed assets. ± Long-term decisions; involve large expenditures. ± Very important to firm’s future. 11-2 Steps to Capital Budgeting 1. Estimate CFs (inflows & outflows). 2. Assess riskiness of CFs. 3. Determine the appropriate cost of capital. 4. Find NPV and/or IRR. 5. Accept if NPV > 0 and/or IRR > WACC. 11-3
Background image of page 1

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

View Full DocumentRight Arrow Icon
What is the difference between independent and mutually exclusive projects? ± Independent projects – if the cash flows of one are unaffected by the acceptance of the other. ± Mutually exclusive projects – if the cash flows of one can be adversely impacted by the acceptance of the other. 11-4 What is the difference between normal and nonnormal cash flow streams? ± Normal cash flow stream – Cost (negative CF) followed by a series of positive cash inflows. One change of signs. ± Nonnormal cash flow stream – Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine, etc. 11-5 Net Present Value (NPV) ± Sum of the PVs of all cash inflows and outflows of a project: 11-6 = + = N 0 t t t ) r 1 ( CF NPV
Background image of page 2
What is Project L’s NPV? NPV S = $19.98 11-7 Year CF t PV of CF t 0 -100 -$100 1 10 9.09 2 60 49.59 3 80 60.11 NPV L = $ 18.79 Solving for NPV: Financial Calculator Solution ± Enter CFs into the calculator’s CFLO register. ± CF 0 = -100 ± CF 1 = 10 ± CF 2 = 60 ± CF 3 = 80 ± Enter I/YR = 10, press NPV button to get NPV L = $18.78.
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 10

Chapter-11 - Chapter 11 The Basics of Capital Budgeting...

This preview shows document pages 1 - 4. Sign up to view the full document.

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