Chapter10_Blackboard

Chapter10_Blackboard - CHAPTER 10 10-1 Chapter Overview...

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CHAPTER 10 10-1
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Chapter Overview Capital investment decisions Comparing capital investment alternatives – Ignoring time value of money • Payback Method • Unadjusted Rate of Return Time value of money concept • PV of future CF • PV of annuity Comparing capital investment alternatives – Adjusting for time value of money • NPV
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Typical Capital Budgeting Decisions Cost reduction Plant expansion Equipment selection Lease or buy Equipment replacement Capital Investment Decisions How managers plan significant outlays on projects that have long-term implications such as the purchase of new equipment and introduction of new products? Purchases of long-term operational assets are capital investments. Once a company purchases operational assets, it is committed to these investments for an extended period of time. Understanding the time value of money concept will help you make rational capital investment decisions.
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Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories . . . Screening decisions . Does a proposed project meet some present standard of acceptance? Preference decisions . Selecting from among several competing courses of action. Purchases of long-term operational assets are capital investments. Evaluating an investment opportunity requires identifying cash flows
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Measuring Investment Cash Inflows Cash Inflows Incremental Revenues Salvage Value Release of Working Capital Cost Savings Measuring Investment Cash Outflows Cash Outflows Increase in Working Capital Requirements Increases in Operating Expenses Initial Investment
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Approaches to Capital Budgeting Decisions Methods of making capital budgeting decisions include Simple Methods Payback Method Unadjusted (Simple) Rate of Return Time Value Methods Net Present Value Internal Rate of Return
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The payback period is the length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates. Payback period = Net cost of investment Annual net cash inflows Payback Method This is a simple and easy approach to looking at the recovery of an investment. When the net annual cash inflow is the same each year , the following formula can be used to compute the payback period:
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Winston Cleaners can purchase a piece of equipment for $100,000 that will reduce labor costs by $40,000 per year over a four-year useful life. Let’s calculate the payback period. Payback period = Net cost of investment Annual net cash inflows Payback period = $ $ = years Payback Method Generally, the shorter the payback period, the better
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The payback method requires adjustment when cash flows are unequal 2009 2010 2011 2012 2013 3,000 $ 1,000 $ 1,000 $ 1,000 $ 1,500 $ Annual Cumulative Year Amount Amount 2009 2010 2011 2012 Let’s assume a company purchases a machine for $6,000, with the cash inflows shown below: Payback Method Payback Period = ? Years
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Another approach is to calculate the average annual cash inflows to compute the payback period. Payback
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This note was uploaded on 02/22/2012 for the course BUAD 2050 taught by Professor Nicholasw.schroeder during the Spring '09 term at Toledo.

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Chapter10_Blackboard - CHAPTER 10 10-1 Chapter Overview...

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