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Unformatted text preview: After reading this chapter, students should be able to: • Define capital budgeting, explain why it is important, and state how project proposals are generally classified. • List the steps involved in evaluating a capital budgeting project. • Calculate payback period, discounted payback period, Net Present Value (NPV), and Internal Rate of Return (IRR) for a given project and evaluate each method. • Define NPV profiles, and explain the rationale behind the NPV and IRR methods, their reinvestment rate assumptions, and which method is better when evaluating independent versus mutually exclusive projects. • Briefly explain the problem of multiple IRRs and when this situation could occur. • Calculate the Modified Internal Rate of Return (MIRR) for a given project and evaluate this method. • Identify at least one relevant piece of information provided to decision makers for each capital budgeting decision method discussed in the chapter. • Identify and explain the purposes of the postaudit in the capital budgeting process. • Identify a number of different types of decisions that use the capital budgeting techniques developed in this chapter. Learning Objectives: 10  1 Chapter 10 The Basics of Capital Budgeting LEARNING OBJECTIVES This is a relatively straightforward chapter, and, for the most part, it is a direct application of the time value concepts first discussed in Chapter 6. We point out that capital budgeting is to a company what buying stocks or bonds is to an individualan investment decision, when the company wants to know if the expected value of the cash flows is greater than the cost of the project, and whether or not the expected rate of return on the project exceeds the cost of the funds required to take on the project. We cover the standard capital budgeting procedurespayback, discounted payback, NPV, IRR, and MIRR. At this point, students who have not yet mastered time value concepts and how to use their calculator efficiently get another chance to catch on. Students who have mastered those tools and concepts have fun, because they can see what is happening and the usefulness of what they are learning. The details of what we cover, and the way we cover it, can be seen by scanning Blueprints , Chapter 10. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50minute periods) Lecture Suggestions: 10  2 LECTURE SUGGESTIONS 101 Project classification schemes can be used to indicate how much analysis is required to evaluate a given project, the level of the executive who must approve the project, and the cost of capital that should be used to calculate the project’s NPV. Thus, classification schemes can increase the efficiency of the capital budgeting process....
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 Spring '11
 ElijahChen
 Net Present Value

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