CFFM6_ch 11_slides

# CFFM6_ch 11_slides - Chapter11 TheBasicsofCapital Budgeting...

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The Basics of Capital  Budgeting Chapter 11 Should we  build this plant? 11-1

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What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve large  expenditures. Very important to firm’s future. 11-2
Steps to Capital Budgeting 1. 2. Assess riskiness of CFs. (we will do this in  ch 12) 3. Determine the appropriate cost of capital. 4. Find NPV and/or IRR. 5. Accept if NPV > 0 and/or IRR > WACC. 11-3

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What 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. Mutually exclusive projects – if the cash flows  of one can be adversely impacted by the  acceptance of the other. 11-4
What 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. 11-5

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Net Present Value (NPV) Sum of the PVs of all cash inflows and  outflows of a project: We have used our CF feature on our  calculator to solve for NPV (we can solve for  IRR as well) 11-6 = + = N 0 t t t )     1   ( CF   NPV
What is Project L’s NPV? NPV

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## This note was uploaded on 02/22/2012 for the course BUAD 3040 taught by Professor Morris during the Spring '08 term at Toledo.

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CFFM6_ch 11_slides - Chapter11 TheBasicsofCapital Budgeting...

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