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Unformatted text preview: tomer base. Another potential savings: lower
paper costs, because more tickets will be issued electronically, even when last-minute changes
are involved. The system is more cost-effective, thereby resulting in better resource utilization
and a higher ROI.
Improved productivity is another benefit to be derived from this wireless project. Delta
hopes to add self-service features so that passengers can choose seats, check in, and handle
other routine transactions online. This will free reservations agents to handle more calls placed
to purchase tickets, thus generating more revenue. Building on its initial success, Delta is ready
to expand its wireless applications. A joint project with American Airlines, United Airlines, and
Boeing Corporation will equip planes with broadband Internet connections so that the airlines
can sell in-flight wireless services. Delta’s innovative technology initiatives have made it one of
five finalists for Computerworld’s 21st Century Achievement Award.
Delta based its decision to accept the wireless-communication project on the project’s positive NPV, which indicated that the project would earn a return above its cost of capital. This
chapter focuses on the capital budgeting techniques, including NPV, that companies use to
accept or reject and to rank proposed projects. H 395 396 PART 3 Long-Term Investment Decisions LG1 9.1 Overview of Capital Budgeting Techniques
When firms have developed relevant cash flows, as demonstrated in Chapter 8,
they analyze them to assess whether a project is acceptable or to rank projects. A
number of techniques are available for performing such analyses. The preferred
approaches integrate time value procedures, risk and return considerations, and
valuation concepts to select capital expenditures that are consistent with the
firm’s goal of maximizing owners’ wealth. This chapter focuses on the use of these
techniques in an environment of certainty. Chapter 10 covers risk and other
refinements in capital budgeting.
We will use one basic problem to illustrate all the techniques described in this
chapter. The problem concerns Bennett Company, a medium-sized metal fabricator that is currently contemplating two projects: Project A requires an initial
investment of $42,000, project B an initial investment of $45,000. The projected
relevant operating cash inflows for the two projects are presented in Table 9.1
and depicted on the time lines in Figure 9.1.1 The projects exhibit conventional
cash flow patterns, which are assumed throughout the text. In addition, we initially assume that all projects’ cash flows have the same level of risk, that projects
being compared have equal usable lives, and that the firm has unlimited funds.
(The risk assumption will be relaxed in Chapter 10.) We begin with a look at the
three most popular capital budgeting techniques: payback period, net present
value, and internal rate of return.2 Hint Remember that the
initial investment is an outflow
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This document was uploaded on 01/19/2014.
- Fall '13