NPV - IRR - handout

NPV - IRR - handout - Capital Budgeting Decision Criteria...

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Unformatted text preview: Capital Budgeting Decision Criteria Mind Map ■ Why?: Think about it – the firm’s current balance sheet is the result of past capital budgeting decisions. Perhaps the most important decision managers make is determination of which capital projects to accept. In this section, we analyze the methods used for making these important capital budgeting decisions. Mind Map ■ Learning objective: – Articulate the desired attributes of a capital budgeting methodology – Determine whether a project is acceptable based on payback, NPV, and IRR – Discuss the weaknesses of payback and IRR Mind Map ■ Key words/concepts: – Payback period – Net present value – Internal rate of return – Cash flow patterns Capital Budgeting : the process of planning for purchases of long- term assets. ■ example : Suppose our firm must decide whether to purchase a new plastic molding machine for $127,000. How do we decide? ■ The Ideal Evaluation Method should: a) include all cash flows that occur during the life of the project, b) consider the time value of money , c) incorporate the required rate of return (i.e., Risk) on the project. Decision-making Criteria in Capital Budgeting Payback Period ■ The number of years needed to recover the initial cash outlay. ■ How long will it take for the project to generate enough cash to pay for itself? Payback Period ■ How long will it take for the project to generate enough cash to pay for itself? 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 150 150 150 Payback Period Payback Period ■ How long will it take for the project to generate enough cash to pay for itself? 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 150 150 150 Payback period = 3.33 years. ■ Is a 3.33 years payback period good?...
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This note was uploaded on 10/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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NPV - IRR - handout - Capital Budgeting Decision Criteria...

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