Chapter12-IFM10 - Chapter 12 Capital Budgeting Decision...

Info iconThis preview shows pages 1–17. Sign up to view the full content.

View Full Document Right Arrow Icon
  1 Chapter 12 Capital Budgeting:  Decision Criteria
Background image of page 1

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

View Full Document Right Arrow Icon
2 Topics Overview and “vocabulary” Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life
Background image of page 2
3 What is capital budgeting? Analysis of potential projects. Long-term decisions; involve large  expenditures. Very important to firm’s future.
Background image of page 3

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

View Full Document Right Arrow Icon
4 Steps in Capital Budgeting Estimate cash flows (inflows &  outflows). Assess risk of cash flows. Determine r = WACC for project. Evaluate cash flows.
Background image of page 4
5 Independent versus Mutually  Exclusive Projects Projects are: independent, if the cash flows of one are  unaffected by the acceptance of the other. mutually exclusive, if the cash flows of one  can be adversely impacted by the  acceptance of the other.
Background image of page 5

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

View Full Document Right Arrow Icon
6 Cash Flows for Franchise L  and Franchise S 10 80 60 0 1 2 3 10% L’s CFs: -100.00 70 20 50 0 1 2 3 10% S’s CFs: -100.00
Background image of page 6
7 NPV: Sum of the PVs of all  cash flows. Cost often is CF 0  and is negative. NPV =   Σ N t = 0 CF t (1 + r) t NPV =   Σ N t = 1 CF t (1 + r) t - CF 0
Background image of page 7

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

View Full Document Right Arrow Icon
8 What’s Franchise L’s NPV? 10 80 60 0 1 2 3 10% L’s CFs: -100.00 9.09 49.59 60.11 18.79 = NPV L NPV S = $19.98.
Background image of page 8
9 Calculator Solution: Enter  values in CFLO register for L. -100 10 60 80 10 CF 0 CF 1 NPV CF 2 CF 3 I/YR = 18.78 = NPV L
Background image of page 9

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

View Full Document Right Arrow Icon
10 Rationale for the NPV Method NPV =  PV inflows – Cost  This is net gain in wealth, so accept  project if NPV > 0. Choose between mutually exclusive  projects on basis of higher NPV.  Adds  most value.
Background image of page 10
11 Using NPV method, which  franchise(s) should be accepted? If Franchise S and L are mutually  exclusive, accept S because NPV s  >  NPV L  . If S & L are independent, accept both;  NPV > 0.
Background image of page 11

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

View Full Document Right Arrow Icon
12 Internal Rate of Return:  IRR 0 1 2 3 CF 0 CF 1 CF 2 CF 3 Cost Inflows IRR is the discount rate that forces PV inflows = cost.  This is the same as forcing NPV = 0.
Background image of page 12
13 NPV:  Enter r, solve for NPV. IRR:  Enter NPV = 0, solve for IRR. = NPV   Σ N t = 0 CF t (1 + r) t = 0   Σ N t = 0 CF t (1 + IRR) t
Background image of page 13

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

View Full Document Right Arrow Icon
14 What’s Franchise L’s IRR? 10 80 60 0 1 2 3 IRR = ? -100.00 PV 3 PV 2 PV 1 0 = NPV Enter CFs in CFLO, then press  IRR: IRR L  = 18.13%. IRR S  =  23.56%.
Background image of page 14
15   40 40   40 0 1 2 3 -100 Or, with CFLO, enter CFs and press  IRR = 9.70%. 3  -100      40         0         9.70% N I/YR PV PMT FV INPUTS OUTPUT Find IRR if CFs are constant:
Background image of page 15

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

View Full Document Right Arrow Icon
16 Rationale for the IRR Method If IRR > WACC, then the project’s rate  of return is greater than its cost-- some  return is left over to boost stockholders’  returns.
Background image of page 16
Image of page 17
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 61

Chapter12-IFM10 - Chapter 12 Capital Budgeting Decision...

This preview shows document pages 1 - 17. Sign up to view the full document.

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