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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FIN 3403 Module 9 - Chapter 11 Page 3 Payback Period ± Number of Years to recover the initial cost of the investment: PB Ö $100 = $10 + $30 + $60 A $100 = $10 + $30 + $60 PB A = 3 years PB B Ö $100 = $50 + ($60)(5/6) PB B = 1 + 5/6 years = 1.83 years Present Value Payback P r o j e c t AP r o j e c t r o j e c t BP r o j e c t B Year PV at 8% PV Total 1 $9.26 $9.26 $46.30 $46.30 2 $25.72 $34.98 $51.44 $97.74 3 $47.63 $82.61 $23.81 $121.55 PVPB A = 3.30 years ($17.39/$58.80) PVPB B = 2.09 years ($ 2.26/$23.81) 4 $58.80 $141.41 $14.70 $136.25 Total $141.41 $141.41 $136.25 $136.25 Net Present Value ± Present value of inflows minus the present value of outflows (costs).
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This note was uploaded on 01/11/2012 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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

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