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Chapter 11 - FIN 3403 - PowerPoint(1)

Chapter 11 - FIN 3403 - PowerPoint(1) - FIN 3403 CHAPTER 11...

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FIN 3403 Module 9 - Chapter 11 Page 1 CHAPTER 11 The Basics of Capital Budgeting Capital Budgeting FIN 3403 - Business Finance Basics Other Topics Internal Rate of Return Payback Net Present Value Profitability Index NPV Profiles NPV versus IRR Methods Capital Budgeting Capital budgeting is how the firm determines what additions it should make to its fixed assets. Involves long-term decisions. Involves large expenditures. Critical to the survival of the firm.
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FIN 3403 Module 9 - Chapter 11 Page 2 Capital Budgeting Classifications Replacement z Maintenance z Cost Reduction Expansion z Existing Product/Markets z New Products/Markets Safety/Environmental Projects Other Projects Capital Budgeting Procedures Estimate cash inflows/outflows. Assess riskiness of the cash flows and determine r (WACC on a risk-adjusted basis) Find NPV and/or IRR Accept if NPV > 0 and/or IRR > WACC Capital Budgeting: Cash Flows Project A Project B Year Cash Flow Cash Flow 0 -$100.00 -$100.00 1 $10.00 $50.00 2 $30.00 $60.00 3 $60.00 $30.00 4 $80.00 $20.00 Total $180.00 $160.00
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