Capital Budgeting Decisions Part I chapter 9 074

Capital Budgeting Decisions Part I chapter 9 074 - Capital...

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Capital Budgeting Decisions
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Capital Budgeting How managers plan significant outlays such as the purchase of new equipment and introduction of new products) on projects that have long-term implications .
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Capital Budgeting Because cash flows (both positive and negative) extend beyond a single business cycle, we must consider the time value of money ’ in our analysis.
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Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions . Does a proposed project meet some present standard of acceptance?
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Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions . Does a proposed project meet some present standard of acceptance? Preference decisions . Selecting from among (ranking) several alternative courses of action.
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Question: Suppose you win the lottery. Which payout would you prefer? 1. $ 10,000,000 each year for 25 years? $250,000,000 at the end of 25 years? $250,000,000 tomorrow? ?????????????????? Who Cares ?????????????????????
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Time Value of Money Business investments extend over long periods of time, so we must recognize the time value of money. Investments that promise returns earlier in time are preferable to those that promise returns later in time. For example
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If $100,000 is invested today at 8% (simple) interest, how much will the investment be worth in two years? Future Value
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At the end of one year that $100,000 would earn $8,000 for a total of $108,000 1.08 X $100,000 = $108,000 Future Value
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Tables are useful tools to calculate future (and present) values. Such tables calculate the future or present value for a single dollar. 5% 6% 7% 8% 10% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 FV Table: This table represents the reciprocal of the Present Value table that is on page 357 of your textbook and is based on the formula: F n = P (1 + r) n Year One Future Value
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At the end of one year that $100,000 would earn $8,000 for a total of $108,000 1.08 X $100,000 = $108,000 At the end of year two that $108,000 will have earned another 8% (an additional $8,640) 1.08 X $108,000 = $116,640 Future Value
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$100,000 X 1.16640 = $116,640 (which is $108,000 plus .08X$108,000) 5% 6% 7% 8% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 FV Table: One Dollar (or any number of dollars) will increase by a factor of 1.166 at the end of two years at 8% interest. Year Two Future Value Alternatively
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At the end of one year that $100,000 would earn $8,000 for a total of $108,000 1.08 X $100,000 = $108,000 At the end of year two that $108,000 will have earned another 8% (an additional $8,640) 1.08 X $108,000 = $116,640 At the end of year three: 1.08 X $116,640 = $125,972 And so on, Future Value
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5% 6% 7% 8% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 $100,000 X 1.25971 = $125,971 FV Table: One Dollar (or any number of dollars) will increase by a factor of 1.25971 at the end of three years at 8% interest. (1.08) 3 Year Three Future Value Alternatively
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5% 6% 7% 8% 9% 10% 1 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 2 1.10250 1.12360 1.14490 1.16640 1.18810 1.21000 3 1.15763 1.19102 1.22504 1.25971 1.29503 1.33100 4 1.19102 1.26248 1.31080 1.36049 1.41158 1.46410 5 1.26248 1.33823 1.40255 1.46933 1.53862 1.61051 6 1.33823 1.41852 1.50073 1.58687 1.67710 1.77156 FV Table: 1.25971 = (1.08) 3 ] Future Value
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Present Value
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Present Value Assume that a bond, or any given investment,
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Capital Budgeting Decisions Part I chapter 9 074 - Capital...

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