Chapter 10 Financial Management

Chapter 10 Financial Management - Financial Management ADM...

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1 Financial Management ADM 2350 Professor: Dr. William F. Rentz
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2 Capital Budgeting Decisions Chapter 10 1. Decision Criteria 2. Capital Rationing 3. Unequal Lives 4. Further Post Audit Considerations 5. Real Options 6. International & Small Firm Considerations
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3 Introduction This chapter looks at capital budgeting decision models It discusses and illustrates the relative strengths and weaknesses of these models It looks at capital rationing and at projects with unequal lives
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4 Introduction This chapter examines project review and post-audit procedures It studies real options It considers some of the problems in making capital budgeting decisions in international and small firms
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5 Capital Budgeting Criteria Net present value (NPV) Profitability index (PI) Internal rate of return (IRR) Payback period (PB)
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6 Net Present Value PV of the stream of future CFs from a project minus the project’s net investment NINV PVNCF NPV - = ( 29 NINV NPV NCF - = = + n t k t t 1 1
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7 NPV for Beaver Brewing* *cash flows are from the previous lecture 963 , 13 $ 000 , 102 $ 957 , 45 $ 840 , 19 $ 240 , 22 $ 000 , 102 $ 25 . 1 760 , 89 $ 25 . 1 000 , 31 $ 25 . 1 800 , 27 $ 3 2 - = - + + = - + + = NPV NPV NPV
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8 NPV for Beaver Brewing NPV of bottling machine is NEGATIVE Beaver should NOT invest in this project
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9 NPV Characteristics NPV 0 acceptable above-normal profits Considers the time value of money Absolute measure of wealth Positive NPVs increase owner’s wealth Negative NPVs decrease owner’s wealth
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10 NPV Characteristics NPV not easily understood CFs over the project’s life reinvested at k Does not consider the value of real options
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11 Conditions Allowing Above- Normal Profits Buyers preferences for established brand names Control of distribution systems Patent control Exclusive ownership of superior natural resources
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12 Conditions Allowing Above- Normal Profits Inability of new firms to acquire factors of production Access to lower cost financial resources Economies of scale Access to superior labour or management talents
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13 Profitability Index
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This note was uploaded on 09/13/2011 for the course ADM 2350 taught by Professor Ronda during the Fall '11 term at University of Ottawa.

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Chapter 10 Financial Management - Financial Management ADM...

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