PK10 - CHAPTER 10 The Fundamentals of Capital Budgeting Learning Objectives 1 Discuss why capital budgeting decisions are the most important

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 10 The Fundamentals of Capital Budgeting Learning Objectives 1. Discuss why capital budgeting decisions are the most important decisions made by a firm’s management. 2. Explain the benefits of using the net present value (NPV) method to analyze capital expenditure decisions, and be able to calculate the NPV for a capital project. 3. Describe the strengths and weaknesses of the payback period as a capital expenditure decision-making tool, and be able to compute the payback period for a capital project. 4. Explain why the accounting rate of return (ARR) is not recommended for use as a capital expenditure decision-making tool. 5. Be able to compute the internal rate of return (IRR) for a capital project, and discuss the conditions under which the IRR technique and the NPV technique produce different results. 6. Explain the benefits of a postaudit review of a capital project. I. Chapter Outline 10.1 An Introduction to Capital Budgeting A. The Importance of Capital Budgeting 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Capital budgeting decisions are the most important investment decisions made by management. The goal of these decisions is to select capital projects that will increase the value of the firm. Capital investments are important because they involve substantial cash outlays and, once made, are not easily reversed. Capital budgeting techniques help management to systematically analyze potential business opportunities in order to decide which are worth undertaking. B. Sources of Information Most of the information needed to make capital budgeting decisions is generated internally, beginning likely with the sales force. Then the production team is involved, followed by the accountants. All this information is then reviewed by the financial managers, who evaluate the feasibility of the project. C. Classification of Investment Projects Capital budgeting projects can be broadly classified into three types: (1) independent projects; (2) mutually exclusive projects; and (3) contingent projects. 1. Independent Projects Projects are independent when their cash flows are unrelated. If two projects are independent, accepting or rejecting one project has no bearing on the decision on the other. 2
Background image of page 2
2. Mutually Exclusive Projects When two projects are mutually exclusive, accepting one automatically precludes the other. Mutually exclusive projects typically perform the same function. 3. Contingent Projects Contingent projects are those in which the acceptance of one project is dependent on another project. There are two types of contingency situations: Projects that are mandatory Projects that are optional 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
D. Basic Capital Budgeting Terms The cost of capital is the minimum return that a capital budgeting project must earn for it to be accepted.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/31/2012 for the course BUS 3140 taught by Professor Bens during the Spring '12 term at FIU.

Page1 / 16

PK10 - CHAPTER 10 The Fundamentals of Capital Budgeting Learning Objectives 1 Discuss why capital budgeting decisions are the most important

This preview shows document pages 1 - 5. Sign up to view the full document.

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