Capital Budgeting - 10 - 1 Capital Budgeting Decisions...

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10 - 1 Agenda: Capital Budgeting Decisions ¾ Need for Capital Investment Appraisal ¾ Investment Appraisal Techniques 1 10 - 2 What is capital budgeting? ± Analysis of potential projects Analysis of potential projects. ± Long-term decisions; involve large expenditures. ± Very important to firm’s future.
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10 - 3 Steps in Capital Budgeting ± Estimate cash flows (inflows & outflows). ± Assess risk of cash flows. ± Determine r = WACC for project. ± Evaluate cash flows. 10 - 4 What is the difference between independent and mutually exclusive projects? Projects are: independent , if the cash flows of one are unaffected by the acceptance of the other. mutually exclusive , if the cash flows of one can be adversely impacted by the acceptance of the other.
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10 - 5 What is the payback period? The number of years required to recover a project’s cost, Or how long does it take to get the business’s money back? 10 - 6 Payback for Franchise L (Long: Most CFs in out years) 10 80 60 01 2 3 -100 CF t Cumulative -100 -90 -30 50 0 100 2.4 = Payback L 2 + 30/80 = 2.375 years
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Capital Budgeting - 10 - 1 Capital Budgeting Decisions...

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