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Lecture_14_student - Lecture 14 Capital Budgeting BD...

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Lecture 14: Capital Budgeting BD Chapter 12
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Topics Overview Methods NPV IRR Comparison of the NPV and IRR Methods Modified IRR (MIRR)
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What is capital budgeting? Analysis of potential projects. Long-term decisions; involve large expenditures. Very important to firm’s future. Procedures Assess risk of cash flows and determine WACC Evaluate cash flows using NPV or IRR approaches.
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More about Capital Budgeting A well managed firm will go to great lengths to encourage good capital budgeting proposals Capital budgeting is not a costless operation. Projects are: independent, if taking one project does not rule out the possibility of taking the other project. mutually exclusive, if we can choose either, or we can reject both, but we cannot accept both projects.
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= + = + + + + + + = N t t t N N r CF NPV r CF r CF r CF CF NPV 0 2 2 1 1 0 ) 1 ( ) 1 ( ... ) 1 ( ) 1 ( NPV approach: Find the present value of each cash flow, including the initial cash flow, discounted at cost of capital r. Sum up the discounted cash flows to obtain NPV
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Lecture_14_student - Lecture 14 Capital Budgeting BD...

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