Lecture_Week_04_6slides - Lectures so farWeeks 1-3 Firms...

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8/7/2011 1 Australian School of Business FINS1613 Business Finance Lecturer: Anh Tu Le FINS1613 – Semester 2, 2011 2 Lectures so far…Weeks 1-3 b Firm’s objective = Maximise firm value b How to measure firm value ? b Financial management decisions: s The Investment Decision b What real assets (long-term individual projects) should the firm invest in? s The Financing Decision s The Dividend Decision ( ) = + = 1 1 t t t r C V Lecture 4: Capital Budgeting An Introduction Lecturer: Anh Tu Le Core Reading: RTBWJ Chapter 8 Truong et al. (2008) FINS1613 – Semester 2, 2011 4 Lecture 4: Learning Objectives b Understand the importance of capital budgeting and the steps in the process b Understand the types of projects a firm may wish to undertake b Understand the decision rules for the main methods of project evaluation b Understand the advantages & disadvantages of each of the main methods for project evaluation FINS1613 – Semester 2, 2011 5 What is capital budgeting? b Capital budgeting is the process of analysing long-term investment projects that will generate cash flow and deciding: s whether a particular project is acceptable, or s which project to choose between a number of possible projects. FINS1613 – Semester 2, 2011 6 Why is capital budgeting important? b Capital expenditures typically require a substantial outlay of funds. b Capital assets have long-term impacts on a business.
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2 FINS1613 – Semester 2, 2011 7 Capital Budgeting Process 1. Generate project proposals s Does the project fit with the firm’s long-term goals? 2. Screening: s How will the project affect the firm? b Type of project b Evaluating different options FINS1613 – Semester 2, 2011 8 Capital Budgeting Process (cont.) 3. Evaluation b Quantitative Analysis S Project worth > Project cost? S Project return > Project required return? b Qualitative Analysis FINS1613 – Semester 2, 2011 9 Capital Budgeting Process (cont.) 4. s Monitoring actual cash flows relative to forecasts 5. Post-implementation Audit s Project follow-up and review FINS1613 – Semester 2, 2011 10 Capital Budgeting Process b How important is each stage? s Amount of time spent by managers Source: Gitman and Maxwell (1985)_USA Stage Time Spent(%) Generating proposals 20.3 Screening 24.4 Evaluation 19.3 22.4 Audit 13.6 FINS1613 – Semester 2, 2011 11 Screening: Type of Project b Projects fall under four general categories: s Replacement s Expansion s s Other projects FINS1613 – Semester 2, 2011 12 b Maintenance of Existing Business s Replacing worn out/damaged equipment used to make profitable products. s
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Lecture_Week_04_6slides - Lectures so farWeeks 1-3 Firms...

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