Chapter 11 Notes
What is capital budgeting?
Long term decisions involve large expenditures
Analysis of potential additions to fixed assets
Very important to firms structure
Steps to capital budgeting
Estimate the cash flows
o
Assess the riskiness of the c
Example of Net Present Value
Years
Initial cost -$
Inflows
Outflows
Net Inflows
Salvage
Net Cash Flo -$
Cost of Capita
PVIF
PV of FCF (fut
Sum of PV's
NPV
-$
Common Shar
Per Share Imp-$
0
30.00
1
$
$
$
20.00 $
14.00 $
6.00 $
2
20.00 $
14.00 $
6.00 $
3
20.
Setp 1
Step 2
9.5 MIRR
Find the future value of each cash flow as of the end of period 5
Find the MIRR that equates the NPV to zero
Step 1
Year
0
1
2
3
4
5
CF's
-$ 125,000.00
$
35,000.00
$
35,000.00
$
35,000.00
$
35,000.00
-$
25,000.00
Cost of Capita
$
$
9.5 Internal Rate of Return
IRR: Breakeven analysis, when does this project breakeven?
If your project costs more than this rate, you are financially in trouble
Definition: Rate of return which equate the NPV to zero when it is used as the discoun
Step 1
II.StockholderAnalysis
1. Whoholdsstockinthecompany?
a. Raytheonhas29,709stockholders.
b. Institutionalinvestorsandmutualfundownershold80%ofRaytheons
stock,andthereare699institutionalinvestors.
c.
2. InsiderHoldings
a. TheinsidersofRaytheonareJamesCartwri
create a table for a car that is valued at 23000. you have a trade in valued
at 2500
the rete is 3.5% and you will finance over 24 months
what is the interest paid in year
1?
$556.97
what is the principle paid in
$10,429.1
year 2?
0
TIM
E
1
BOY
PMT
INT
PR
Chapter 13 Notes
What determines business risk?
Competition is there a lot of competition within your industry
Is there a lot of demand
Usually if raw materials fluctuate a lot the output price would fluctuate a lot
Output prices different for each compan
FIN 3010
FINANCIAL MANAGEMENT
FORMULA PAGE FOR Time Value of Money & Capital Budgeting Problems
FV
FVA
PV
PVA
K
K
n
T
m
PMT
FVIF (Has to be 1 or greater)
FVIFA
PVIF (Has to be 1 or lower)
PVIFA
Future Value
Future Value of an Annuity
Present Value
Present