BADM 7090 IIIB 2011 - Capital Investment Decisions (Applying the Net Present Value Rule)

BADM 7090 IIIB 2011 - Capital Investment Decisions (Applying the Net Present Value Rule)

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
BADM 7090 Financial Management Unit III.B Capital Investment Decisions: Applying the Net Present Value Rule Text material: GSM, Ch. 8 D. Chance
Background image of page 1

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

View Full DocumentRight Arrow Icon
Version: 1/3/11 D. Chance – BADM 7090 – Unit IIIB p. 2 of 14 Questions How do we identify the cash flows to include in an NPV analysis? How does inflation affect the cash flows and the determination of NPV ? How do depreciation and taxes affect the cash flows?
Background image of page 2
Version: 1/3/11 D. Chance – BADM 7090 – Unit IIIB p. 3 of 14 Identifying Cash Flows The only cash flows that should be considered are those that are incremental: That is, those cash flows that change as a result of the acceptance of the new project. This includes All incidental and side cash costs and revenues Additional working capital What about Opportunity costs sunk costs overhead?
Background image of page 3

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

View Full DocumentRight Arrow Icon
Version: 1/3/11 D. Chance – BADM 7090 – Unit IIIB p. 4 of 14 Identifying Cash Flows (cont.) What about inflation? The correct approach is to incorporate inflation into cash flows as well as the discount rate.
Background image of page 4
Version: 1/3/11 D. Chance – BADM 7090 – Unit IIIB p. 5 of 14 Identifying Cash Flows (cont.) Example Problem III.B(1) : Suppose you invest $50 today and have an expected cash flow in time 1 of $60, not considering inflation. The real cost of capital is 10%. Expected inflation is 5%. What is the NPV? Expected cash flow is adjusted to $60(1.05) = $63 The cost of capital is adjusted to (1.10)(1.05) – 1 = 15.5% NPV = $63/1.155 - $50 = $4.55 Alternatively you can discount real cash flows at the real rate: $60/1.10 - $50 = $4.55
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/28/2012 for the course BADM 7090 taught by Professor Staff during the Fall '08 term at LSU.

Page1 / 14

BADM 7090 IIIB 2011 - Capital Investment Decisions (Applying the Net Present Value Rule)

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online