ch13M_sp110

ch13M_sp110 - BCOR 2000 Chapter 13M Capital Budgeting...

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BCOR 2000 – Chapter 13M Capital Budgeting Decisions Capital Budgeting Decisions
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Capital Budgeting Planning related to long-term investments Examples of Capital Budgeting Decisions: Opening a new location Expansion of existing facilities Cost reduction plant/equipment replacements Lease or buy Buy new or used Timing of long-term asset purchase
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Capital Budgeting Capital Budgeting Decisions into two broad categories: Screening – whether proposed project is acceptable (assuming no rationing) Preference – selecting from set of acceptable projects
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Capital Budgeting and Present Value Techniques Incorporate time value of money into capital budgeting evaluation Two related present value techniques: 1.Net Present Value (NPV) = PV (inflows) - PV(outflows) 2.Internal Rate of Return (IRR) = the discount rate that equates PV(inflows) and PV(outflows); or the discount rate that makes NPV = 0
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NPV Evaluation - Is NPV  > < , or = 0? Typical Cash Inflows: Incremental revenues Reduction of costs Salvage value (@ end) Release of related WC (@ end) Typical Cash Outflows: Initial Investment Related WC Incremental operating costs Required repairs and maintenance
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Selecting a Discount Rate Cost of Capital (CoC) usually regarded as minimum
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ch13M_sp110 - BCOR 2000 Chapter 13M Capital Budgeting...

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