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2. New Capital Budgeting Criteria(1)

2. New Capital Budgeting Criteria(1) - SchoolofBusiness...

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1 Click to edit Master subtitle style Corporate Financial Management School of Business  Administration University of Miami Capital Budgeting Criteria
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 Replaces slides 36 to end for Advanced Capital  22 Assigned Readings & Problems Reading:  EFS Chapter 9 Homework Problems:  EFS Chapter 9 Questions/Challenging Questions: 3, 4, 5, 7, 8, 10, 12, 13 All problems (A, B, and C)
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 Replaces slides 36 to end for Advanced Capital  33 Objectives In this lecture, you will learn to assess whether a new  project is an economically sound investment  Specifically, we will: Define capital budgeting Use the following capital budgeting criteria to determine whether  a project is a sound investment: Payback Discounted Payback Net Present Value (NPV) Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR)
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 Replaces slides 36 to end for Advanced Capital  44 Choose the best/better among these criteria to assess a  particular project(s) Choose among mutually exclusive projects Construct NPV profiles
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 Replaces slides 36 to end for Advanced Capital  55 Introduction What is Capital Budgeting?   A process for making prudent capital investment decisions  based on the timing and risk characteristics of available projects We generally measure “prudence” by whether the Net Present  Value (NPV) of the project’s cash flows are positive or,  equivalently, by whether the project’s cash flows provide a  return that at least equals the risk adjusted cost of capital,  WACC! Capital Budgeting is a critical function of the financial managers  of a firm.  Critical decisions involving the analysis of potential  additions to fixed assets.  These can be Long-term decisions  involving large expenditures
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 Replaces slides 36 to end for Advanced Capital  66 Ultimately, we’ll use the following steps for good Capital  Budgeting   * For mutually exclusive project choices and for projects with nonconventional cash flows,  we’ll see IRR is inappropriate. More on that later! 1.  Estimate CFs (inflows & outflows) 2.  Assess riskiness of CFs 3.  Determine WACC for project 4.  Find NPV and/or IRR 5.  Accept if NPV > 0 and/or IRR > WACC Subject to the limitations of the IRR approach *
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 Replaces slides 36 to end for Advanced Capital  77 Capital Budgeting never should occur in a vacuum! While our focus will be on decisions rules for acceptance/rejection,  a good capital budgeting system does more than just make accept- reject decisions.
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