361-CH11Concise - 11-1CHAPTER 11The Basics of Capital...

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Unformatted text preview: 11-1CHAPTER 11The Basics of Capital BudgetingShould we build thisplant?11-2What is capital budgeting?Analysis of potential additions to fixed assets investment analysis.Long-term decisions; involve large expenditures (see p. 359-360).Very important to firms future (see Airbus, Boeing p. 357-358).11-3Steps to capital budgeting1.Estimate CFs (inflows & outflows).2.Assess riskiness of CFs.3.Determine the appropriate cost of capital (%).4.Find NPV ($), IRR (%) and/or MIRR (%).5.Accept if NPV > 0 and/or IRR > WACC.11-4What is the difference between independent and mutually exclusive projects?Independent projects if the cash flows of one are unaffected by the acceptance of the other more than one project may be accepted.Mutually exclusive projects if the cash flows of one project can be adversely impacted by the acceptance of the other accept one or the other.11-5An Example of Mutually Exclusive ProjectsBRIDGE vs. BOAT to get products across a river.11-6What is the difference between normal and nonnormal cash flow streams?Normal cash flow stream Cost (negative CF) followed by a series of positive cash inflows. One change of signs.Nonnormal cash flow stream Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine, etc.11-7Inflow (+) or Outflow (-) in Year12345NNN-+++++N-++++-NN---+++N---+++N-++-+-NN11-8Net Present Value (NPV)Sum of the PVs of all cash inflows and outflows of a project:=+=Nttt)r 1 (CF NPV 11-9Calculating paybackPaybackL= 2 + / = 2.375 yearsCFt-100 10 60 100Cumulative -100 -90 0 50123=2.4308080-30Project LPaybackS= 1 + / = 1.6 yearsCFt-100 70 100 20Cumulative -100 0 20 40123=1.6305050-30Project S11-10What is Project Ls NPV @ 10%?Year CFtPV of CFt 0-100 -$100 1 10 9.09 2 60 49.59 3 80 60.11 NPVL = $18.79NPVS = $19.98 @ 10%11-11Solving for NPV:Financial calculator solutionEnter CFs into the calculators CFj register....
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361-CH11Concise - 11-1CHAPTER 11The Basics of Capital...

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