Week04_LectureNotes_6SlidesPerPage - Lectures so farWeeks...

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1 Lectures so far…Weeks 1-3 Firm’s objective = Maximise firm value How to measure firm value? t C V Financial management decisions:- – The Investment Decision – The Financing Decision – The Dividend Decision  1 1 t t r FINS1613_s2_2010_L4 1 FINS1613 Business Finance Lecture 4: Capital Budgeting- An Introduction Core Reading: RTBWJ Chapter 8 Additional Readings: Graham & Harvey (2001) Truong et al. (2008) Lecture 4: Learning Objectives Understand the importance of capital budgeting and the steps in the process Understand the types of projects a firm may wish to undertake Understand the decision rules for the main methods of Understand the decision rules for the main methods of project evaluation Understand the advantages & disadvantages of each of the main methods for project evaluation 3 FINS1613_s2_2010_L4 What is capital budgeting? Capital budgeting is the process of analysing long-term investment projects that will generate cash flow and deciding: – whether a particular project is acceptable, or – which projec to choose between a numbe o possible projects which project to choose between a number of possible projects. 4 FINS1613_s2_2010_L4 Capital Budgeting Process 1. Generate project proposals Does the project fit with the firm’s long-term goals? 2. Screening: How will the project affect the firm? •T y p e o f p r o j e c t Evaluating different options 5 FINS1613_s2_2010_L4 Capital Budgeting Process (cont.) 3. Evaluation Quantitative Analysis – Project worth > Project cost? – Project return > Project required return? Qualitative Analysis 6 FINS1613_s2_2010_L4
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2 Capital Budgeting Process (cont.) 4. Implementation & Control Monitoring actual cash flows relative to forecasts 5 Pos implementation Audi 5. Post-implementation Audit Project follow-up and review 7 FINS1613_s2_2010_L4 Capital Budgeting Process How important is each stage? Amount of time spent by managers Stage Time Spent(%) Generating proposals 20.3 Source: Gitman and Maxwel (1985)_USA Screening 24.4 Evaluation 19.3 Implementation & Control 22.4 Audit 13.6 FINS1613_s2_2010_L4 8 Screening: Type of Project Projects fall under four general categories: – Replacement – Expansion Safet & Environmenta – Safety & Environmental – Other projects 9 FINS1613_s2_2010_L4 Screening: Replacement Maintenance of Existing Business Cost Reduction 10 FINS1613_s2_2010_L4 Screening: Expansion Existing Markets or Products New Markets or Products 11 FINS1613_s2_2010_L4 Screening: Safety & Environmental Mandatory investments to ensure compliance with government legislation on safety or environmental issues. The investment may or may not result in any positive cash flows for the firm. Projects of this type require analysis of how the firm will fund the investment and its impact on the firm.
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This note was uploaded on 07/25/2011 for the course FINS 1613 taught by Professor Drkhshim during the Two '10 term at University of New South Wales.

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Week04_LectureNotes_6SlidesPerPage - Lectures so farWeeks...

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