CAPITAL BUDGETING TECHNIQUES
Firms must constantly search for ways to improve their existing products or to find new products to sell.
However, not all proposed ideas can be pursued because firms have limited capital.
Therefore, financial managers
MUTUALLY EXCLUSIVE PROJECTS
I noted before, the presence of mutually exclusive projects complicates capital budgeting
In this section, we examine how investments should be analyzed in this case.
Thus far, we have asked whether
The NPV rule suggests that firms should accept all positive NPV projects.
However, accepting all NPV > 0 projects is not possible if the firm has insufficient cash to cover
the period 0 cash outflows for all the investments.
PROJECT RISK ANALYSIS AND EVALUATION
Financial managers generally want to know more about a project than just its NPV.
They also want to know the sources of uncertainty in the projects cash flows as well as the
quantitative importance of each source.
THE APPROPRIATE DISCOUNT RATE FOR CAPITAL BUDGETING
We learned that the expected return on a portfolio is equal to the weighted average of the expected return
of each asset in the portfolio.
We can apply this idea to determine the appropriate discount rat
CAPITAL BUDGETING - CASH FLOWS
Last class, we saw that the NPV method, supplemented by the IRR and the PI, is used when
deciding whether or not to accept potential projects.
Conceptually, the decision is straightforward: A potential proje
MIDTERM 1 REVIEW
Formula Sheet provided
Review sheet is the test
10 Theory Questions (1.25 points)
o 1-33 terms from the review sheet
15 Computation Questions (2.25 points)
o 1-15 formulas from the review sheet
o 1 question from each!
PART II: THEORY QUESTIONS (1.5 point each)
1. IRR, MIRR, NPV, PI and Capital Budgeting: They all take into account the issues: cash flows,
time value of money, risk, and effect on the value
IRR (Internal Rate of Return) Also known as the breakeven