042110_for_posting_v2003

042110_for_posting_v2003 - OVERVIEW: Capital Budgeting...

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OVERVIEW: Capital Budgeting Techniques NOTES: Net present value PV of cash inflows less: PV of cash outflows Profitability index NPV Investment Internal rate of return Investment Net annual cash flows to get the factor used in an annuity table, to then get rate Discount rate that results in a NPV of 0 Payback period Investment Net annual cash flow Number of years needed to recover the investment Accounting rate of return Annual net operating income Initial (or average) investment* *reduced by salvage value of the old equipment, if any Kattelus - Spring 2010
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Ranking Investment Projects Profitability Present value of cash inflows index Investment required = A B Present value of cash inflows $81,000 $6,000 Investment required 80,000 5,000 Profitability index 1.01 1.20 Investment The higher the profitability index, the more desirable the project. Kattelus - Spring 2010
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DEMO: Project Profitability Index A company is analyzing projects A and B as possible investment opportunities. Each has a useful life of eight years. Project A Project B Initial investment $250,000 $475,000 P.V. of future net cash inflows $290,000 $503,000 The following statements are true. Why? I. A is preferred to B according to an NPV ranking. II. A is preferred to B according to a project profitability index ranking. 3 Kattelus - Spring 2010
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Kattelus - Spring 2010 4 On preferences for projects Big Corporation is considering three investment projects-S, T, and U. Project S would require an investment of $20,000, Project T of $69,000, and Project U of $83,000. No other cash outflows would be involved. The present value of the cash inflows would be $23,200 for Project S, $77,970 for Project T, and
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This note was uploaded on 10/17/2011 for the course ECON 101 taught by Professor Thompson during the Spring '11 term at Michigan State University.

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042110_for_posting_v2003 - OVERVIEW: Capital Budgeting...

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