capital - Capital budgeting Overview Multiperiod...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Capital budgeting: Overview 8/5/98 Multiperiod decision-making Managers must make many decisions that have effects on their firm’s profits (and cash flows) over multiple time periods. Examples of such decisions include the decision to build a new production facility or purchase production equipment, and the decision to acquire an equity interest in another firm. These types of managerial decisions are most often termed capital budgeting . The capital budgeting process is the process where managers make decisions about how to allocate financial capital to various proposed plans (usually called “projects”) in order to maximize profits. Consider the following example of expected profits from two proposed plans: 1998 1999 2000 2001 Total Expected profits--Plan 3 ……… $10,000 $10,000 $10,000 $10,000 $40,000 Expected profits--Plan 4 ……… (10,000) 20,000 30,000 40,000 80,000 Difference …………………… $20,000 ($10,000) ($20,000) ($30,000) ($40,000) Note that a single-period decision model cannot adequately capture the complexity of the differences in the expected streams of profits: Plan 1 would clearly be preferred if only the first year after implementation (i.e., 1998) were considered since the profit differential relative to Plan 2 is a positive $20,000; however, over a four year horizon time Plan 2 is clearly superior to Plan 1. This suggests that it is necessary to analyze the changes in profits that are expected to result over multiple (future) time periods in order to make appropriate managerial decisions.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern