FIN3010_CBTech_Simplified

FIN3010_CBTech_Simplified - Capital Budgeting Techniques 2...

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Unformatted text preview: Capital Budgeting Techniques 2 What is Capital Budgeting? The process of evaluating long-term investment options. Firms must decide which projects to accept; capital budgeting techniques can help firms decide. Analysis of potential additions to fixed assets Long-term decisions; involve large expenditures Very important to firm’s future 3 Generating Ideas for Capital Projects A firm’s growth and its ability to remain competitive depend on a constant flow of ideas for new products, ways to make existing products better, and ways to produce output at a lower cost. Procedures must be established for evaluating the worth of such projects. 4 Steps in the Capital Budgeting Process 1. Identify opportunities 2. Evaluate opportunities 3. Select projects or investments 4. Implementation 5. Post implementation audit Managers should separate investment and financing decisions 5 Project Classifications Replacement Decisions: Replacement Decisions: whether to purchase capital assets to take the place of existing assets to maintain or improve existing operations Expansion Decisions: Expansion Decisions: whether to purchase capital projects and add them to existing assets to increase existing operations Independent Projects: Independent Projects: Projects whose cash flows are not affected by decisions made about other projects Mutually Exclusive Projects: Mutually Exclusive Projects: A set of projects where the acceptance of one project means the others cannot be accepted 6 Evaluation Techniques 1. Payback period 2. Profitability index 3. Net present value 4. Internal rate of return 5. Modified internal rate of return 7 Similarities between Capital Budgeting and Asset Valuation Uses same steps as in general asset valuation 1. Determine the cost, or purchase price, of the asset....
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This note was uploaded on 12/12/2011 for the course ECONOMICS 101 taught by Professor Thoman during the Spring '09 term at Abu Dhabi University.

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FIN3010_CBTech_Simplified - Capital Budgeting Techniques 2...

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