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Unformatted text preview: Chapter 11 The Basics of Capital Budgeting Learning Objectives After reading this chapter, students should be able to: Define capital budgeting, explain why it is important, differentiate between security valuation and capital budgeting, and state how project proposals are generally classified. Calculate net present value (NPV) and internal rate of return (IRR) for a given project and evaluate each method. Define NPV profiles, the crossover rate, and explain the rationale behind the NPV and IRR methods, their reinvestment rate assumptions, and which method is better when evaluating independent versus mutually exclusive projects. Briefly explain the problem of multiple IRRs and when this situation could occur. Calculate the modified internal rate of return (MIRR) for a given project and evaluate this method. Calculate both the payback and discounted payback periods for a given project and evaluate each method. Identify at least one relevant piece of information provided to decision makers for each capital budgeting decision method discussed in the chapter. Identify a number of different types of decisions that use the capital budgeting techniques developed in this chapter. Identify and explain the purposes of the postaudit in the capital budgeting process. Chapter 11: The Basics of Capital Budgeting Learning Objectives 9 Lecture Suggestions This is a relatively straightforward chapter, and, for the most part, it is a direct application of the time value concepts first discussed in Chapter 2. We point out that capital budgeting is to a company what buying stocks or bonds is to an individual—an investment decision, when the company wants to know if the expected value of the cash flows is greater than the cost of the project, and whether or not the expected rate of return on the project exceeds the cost of the funds required to do the project. We cover the standard capital budgeting procedures—NPV, IRR, MIRR, payback and discounted payback. At this point, students who have not yet mastered time value concepts and how to use their calculator efficiently get another chance to catch on. Students who have mastered those tools and concepts have fun, because they can see what is happening and the usefulness of what they are learning. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 11, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes.lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes....
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 Spring '08
 Geottle
 Valuation

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