Capital Budgeting Decisions
|
|
- Sherilyn Carson
- 5 years ago
- Views:
Transcription
1 May 1-4, 2014 Capital Budgeting Decisions
2 Today s Agenda n Capital Budgeting n Time Value of Money n Decision Making Example n Simple Return and Payback Methods
3 Typical Capital Budgeting Decisions n Capital budgeting analysis is used to decide when to invest in capital (typically hard assets). n Investment is tested against return requirements, or alternative investments Plant expansion Equipment selection Equipment replacement Lease or buy Cost reduction
4 Typical Capital Budgeting Decisions Capital budgeting tends to fall into two broad categories. 1. Screening decisions. Does a proposed project meet some preset standard of acceptance? 2. Preference decisions. Selecting from among several competing courses of action.
5 Time Value of Money A dollar today is worth more than a dollar a year from now. Therefore, projects that promise earlier returns are preferable to those that promise later returns.
6 Time Value of Money n Analysis of whether to invest capital requires the expectation of long term returns n Therefore we need to identify the cash flows associated with the investment over years n Time Value of Money methodologies are required to n Compare one investment against an alternative n See if an investment meets return requirements
7 Time Value of Money n Time Value of Money n Money now is worth more than money in the future n How much more is determined by the discount rate n Discounted Cash Flows n The stating of cash inflows and outflows over time and discounted to a given point in time n Internal Rate of Return (IRR) n The discount rate that results from discounting the cash flows n Net Present Value (NPV) n Yields an absolute value after DCF of cash flows at a discount rate
8 Time Value of Money n Note: Focus is on Cash Flows, not accounting income. Why? n Accounting Net Income is based on accruals n Accruals ignore the timing of cash flows into and out of an organization n Examples? n Accounts Receivable recognized as income, but cash not yet received n Payroll Payable expensed on income statement, but cash not yet paid to employees
9 The Net Present Value Method To determine net present value we... Calculate the present value of cash inflows, Calculate the present value of cash outflows, Subtract the present value of the outflows from the present value of the inflows.
10 Typical Cash Flows n Inflows n Incremental revenue n Cash from disposal of assets n Reductions in working capital n Incremental cost reduction n Outflows n Initial and on-going capital investment n Incremental operating costs n Increases in working capital
11 The Net Present Value Method If the Net Present Value is... Then the Project is... Positive... Acceptable because it promises a return greater than the required rate of return. Zero... Acceptable because it promises a return equal to the required rate of return. Negative... Not acceptable because it promises a return less than the required rate of return. n The outcome is dependent upon the selected Discount Rate
12 Choosing a Discount Rate n The cost of capital is the average rate of return the company must pay to its long-term creditors and stockholders for the use of their funds. n The firm s cost of capital is usually regarded as the minimum required rate of return.
13 Two Simplifying Assumptions n Two simplifying assumptions are usually made in net present value analysis: All cash flows other than the initial investment occur at the end of periods. All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate. n More complex models can be built; eg, periods can be shrunk to quarterly, monthly, etc. to increase accuracy.
14 Net Present Value Method The net present value of one project cannot be directly compared to the net present value of another project unless the investments are equal.
15 Preference Decision The Ranking of Investment Projects Screening Decisions Preference Decisions Pertain to whether or not some proposed investment is acceptable; these decisions come first. Attempt to rank acceptable alternatives from the most to least appealing.
16 NPV - Example n Capital Budget Decision - n Should May Company buy new or refurbish old jet fleet n New jets cost $30m, training will cost $2m, but they only require $1m/yr to maintain and $4m/yr to operate. Also, May can charge $3m/yr extra to customers n Refurbishing the old fleet would cost $10m, but maintenance would still be $3m/yr and operating costs $5m/yr n At the end of 5 years, the new jets would be worth $10m and the refurbished jets, $2m n What should May Co do?
17 NPV - Example May Company Capital Budgeting Decision ($ millions) Now Y1 Y2 Y3 Y4 Y5 Purchase New Jets Purchase Price - 30 Training - 2 Maintenance Operating Costs Incremental Revenue Value at Y5 10 Cash Flow (net) NPV (10%) - $29.51 Overhaul Existing Fleet Repair and Overhaul - 10 Maintenance Operating Costs Value at Y5 2 Cash Flow (net) NPV (10%) - $40.08
18 NPV Evaluation of Alternatives Approach May Company Capital Budgeting Decision ($ millions) Now Y1 Y2 Y3 Y4 Y5 Purchase New Jets Revenue Purchase Price - 30 Training - 2 Maintenance Operating Costs Value at Y5 10 Cash Flow (net) % NPV $43.04 Overhaul Existing Fleet Revenue Repair and Overhaul - 10 Maintenance Operating Costs Value at Y5 2 Cash Flow (net) % NPV $38.88
19 Ranking Investment Projects Profitability index = Net present value of the project Investment required Investment A B Net present value (a) $800 $1,000 Investment required (b) $80,000 $5,000 Profitability index (a) (b) The higher the profitability index, the more desirable the project. Therefore, investment B is more desirable than investment A. n Another name for Return on Investment (ROI)
20 IRR Test Evaluation of Alternatives May Company Capital Budgeting Decision ($ millions) Now Y1 Y2 Y3 Y4 Y5 Purchase New Jets Revenue Purchase Price - 30 Training - 2 Maintenance Operating Costs Value at Y5 10 Cash Flow (net) % NPV $43.04 IRR 78% Overhaul Existing Fleet Revenue Repair and Overhaul - 10 Maintenance Operating Costs Value at Y5 2 Cash Flow (net) % NPV $38.88 IRR 127%
21 Decision Time n What should May Co do? May Company Capital Budget Decision New Old "Least Cost" NPV - $ $40.08 Full P&L - NPV $43.04 $38.88 Full P&L - IRR 78% 127% n n n NPV s are not comparable if investments are not equivalent All other factors being equal (including investment amount), May Co should refurbish the old planes n Achieves maximum profitability However, all other factors are never equal n Potentially, market value may be maximized by employing more capital at 78% IRR than less at 127%
22 Decision Time May Company Capital Budget Decision New Old "Least Cost" NPV - $ $40.08 Full P&L - NPV $43.04 $38.88 Full P&L - IRR 78% 127% n The ultimate decision requires knowledge of the following: n Is capital constrained? Can the company actually raise further capital at 20%? n What other alternative investments can the company deploy capital into, and at what rate of return. n If the company has the money, and the second best IRR is below 78%, then profit is maximized by making the new investment.
23 Net Present Value Method The net present value of one project cannot be directly compared to the net present value of another project unless the investments are equal.
24 Simple Rate of Return Method n Does not focus on cash flows -- rather it focuses on accounting net operating income. n The following formula is used to calculate the simple rate of return: Simple rate of return = Annual Incremental Net Operating Income Initial investment* *Should be reduced by any salvage from the sale of the old equipment
25 The Payback Method The payback period is the length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates. When the net annual cash inflow is the same each year, this formula can be used to compute the payback period: Payback period = Investment required Net annual cash inflow
26 Postaudit of Investment Projects A postaudit is a follow-up after the project has been completed to see whether or not expected results were actually realized.
27 Tutorial n Assignment n Review Build versus Buy Decisions n Study Review Problems n Interim Progress Reports on Group Projects n Tutorial session on Group Projects n Bring laptops and financial statements
28 The Mathematics of Interest Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year? F n = P(1 + r) n
29 The Mathematics of Interest Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year? F n = P(1 + r) n F 1 = $100(1 +.08) 1 F 1 = $108.00
30 Compound Interest What if the $108 was left in the bank for a second year? How much would the original $100 be worth at the end of the second year? F n = P(1 + r) n
31 Compound Interest F 2 = $100(1 +.08) 2 F 2 = $ The interest that is paid in the second year on the interest earned in the first year is known as compound interest.
32 Computation of Present Value An investment can be viewed in two ways its future value or its present value. Present Value Future Value Let s look at a situation where the future value is known and the present value is the unknown.
33 Present Value If a bond will pay $100 in two years, what is the present value of the $100 if an investor can earn a return of 12% on investments? P = F n (1 + r) n
34 Present Value $100 P = (1 +.12) 2 P = $79.72 This process is called discounting. We have discounted the $100 to its present value of $ The interest rate used to find the present value is called the discount rate.
35 Present Value Let s verify that if we put $79.72 in the bank today at 12% interest that it would grow to $100 at the end of two years. Year 1 Year 2 Beginning balance $ $ % $ 9.57 $ Ending balance $ $ If $79.72 is put in the bank today and earns 12%, it will be worth $100 in two years.
36 Present Value An Example $ = $79.72 present value (rounded) Rate Periods 10% 12% 14% Present value factor of $1 for 2 periods at 12%.
37 Quick Check ü How much would you have to put in the bank today to have $100 at the end of five years if the interest rate is 10%? a. $62.10 b. $56.70 c. $90.90 d. $51.90
38 Quick Check ü How much would you have to put in the bank today to have $100 at the end of five years if the interest rate is 10%? a. $62.10 b. $56.70 c. $90.90 d. $51.90 $ = $62.10
39 Present Value of a Series of Cash Flows An investment that involves a series of identical cash flows at the end of each year is called an annuity. $100 $100 $100 $100 $100 $
40 Present Value of a Series of Cash Flows Lacey Inc. purchased a tract of land on which a $60,000 payment will be due each year for the next five years. What is the present value of this stream of cash payments when the discount rate is 12%?
41 Present Value of a Series of Cash Flows We could solve the problem like this... Present Value of an Annuity of $1 Periods 10% 12% 14% $60, = $216,300
42 Quick Check ü If the interest rate is 14%, how much would you have to put in the bank today so as to be able to withdraw $100 at the end of each of the next five years? a. $34.33 b. $ c. $ d. $360.50
43 Quick Check ü If the interest rate is 14%, how much would you have to put in the bank today so as to be able to withdraw $100 at the end of each of the next five years? a. $34.33 b. $ c. $ $ = $ d. $360.50
44 Quick Check ü If the interest rate is 14%, what is the present value of $100 to be received at the end of the 3rd, 4th, and 5th years? a. $ b. $ c. $ d. $300.00
45 Quick Check ü If the interest rate is 14%, what is the present value of $100 to be received at the end of the 3rd, 4th, and 5th years? a. $ b. $ c. $ d. $ $100 ( ) = $ = $ or $100 ( ) = $ = $178.60
Capital Budgeting Decisions
Capital Budgeting Decisions Chapter 13 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright 2012
More informationThe Mathematics of Interest An Example Assume a bank pays 8% interest on a $100 deposit made today. How much
The Mathematics of Interest An Example CAPITAL BUDGETING Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year? F n = P(1 + r) n 1 3 Typical Capital Budgeting
More informationDescribe the importance of capital investments and the capital budgeting process
Chapter 20 Making capital investment decisions Affects operations for many years Requires large sums of money Describe the importance of capital investments and the capital budgeting process 3 4 5 6 Operating
More informationAGENDA: CAPITAL BUDGETING DECISIONS
TM 13-1 AGENDA: CAPITAL BUDGETING DECISIONS A. Present value concepts. 1. Interest calculations. 2. Present value tables. B. Net present value method. C. Internal rate of return method. D. Cost of capital
More informationCapital Budgeting Decisions. M. En C. Eduardo Bustos Farías
Capital Budgeting Decisions M. En C. Eduardo Bustos Farías 1 PELÍCULA 2 Capital investment decisions are concerned with the process of planning, setting goals and priorities, arranging financing, and using
More informationCAPITAL BUDGETING. Key Terms and Concepts to Know
CAPITAL BUDGETING Key Terms and Concepts to Know Capital budgeting: The process of planning significant investments in projects that have long lives and affect more than one future period, such as the
More informationINVESTMENT CRITERIA. Net Present Value (NPV)
227 INVESTMENT CRITERIA Net Present Value (NPV) 228 What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value
More informationLO 1: Cash Flow. Cash Payback Technique. Equal Annual Cash Flows: Cost of Capital Investment / Net Annual Cash Flow = Cash Payback Period
Cash payback technique LO 1: Cash Flow Capital budgeting: The process of planning significant investments in projects that have long lives and affect more than one future period, such as the purchase of
More informationChapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS
Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 10-1 a. Capital budgeting is the whole process of analyzing projects and deciding whether
More informationChapter 7: Investment Decision Rules
Chapter 7: Investment Decision Rules -1 Chapter 7: Investment Decision Rules Note: Read the chapter then look at the following. Fundamental question: What criteria should firms use when deciding which
More informationSession 2, Monday, April 3 rd (11:30-12:30)
Session 2, Monday, April 3 rd (11:30-12:30) Capital Budgeting Continued and the Cost of Capital v2.0 2014 Association for Financial Professionals. All rights reserved. Session 3-1 Chapters Covered Internal
More informationSoftware Economics. Metrics of Business Case Analysis Part 1
Software Economics Metrics of Business Case Analysis Part 1 Today Last Session we covered FV, PV and NPV We started with setting up the financials of a Business Case We talked about measurements to compare
More informationInvestment Decision Criteria. Principles Applied in This Chapter. Disney s Capital Budgeting Decision
Investment Decision Criteria Chapter 11 1 Principles Applied in This Chapter Principle 1: Money Has a Time Value. Principle 2: There is a Risk-Return Tradeoff. Principle 3: Cash Flows Are the Source of
More informationWhat is it? Measure of from project. The Investment Rule: Accept projects with NPV and accept highest NPV first
Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows 0 -$100 -$150 1 $70 $100 2 $70 $100 What
More informationCapital Budgeting: Decision Criteria
Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows 0 -$100 -$150 1 $70 $100 2 $70 $100 What
More informationAnalyzing Project Cash Flows. Chapter 12
Analyzing Project Cash Flows Chapter 12 1 Principles Applied in This Chapter Principle 3: Cash Flows Are the Source of Value. Principle 5: Individuals Respond to Incentives. 2 Learning Objectives 1. Identify
More informationIbrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)
Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing) Introduction A long term view of benefits and costs must be taken when reviewing a capital expenditure project.
More informationChapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria
Chapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria We need to ask ourselves the following questions when evaluating decision criteria Does the decision rule adjust for the
More informationInvestment Decision Criteria. Principles Applied in This Chapter. Learning Objectives
Investment Decision Criteria Chapter 11 1 Principles Applied in This Chapter Principle 1: Money Has a Time Value. Principle 2: There is a Risk-Return Tradeoff. Principle 3: Cash Flows Are the Source of
More informationSoftware Economics. Introduction to Business Case Analysis. Session 2
Software Economics Introduction to Business Case Analysis Session 2 Today Last Session we covered FV, PV and NPV We started with setting up the financials of a Business Case We talked about measurements
More informationAll In One MGT201 Mid Term Papers More Than (10) BY
All In One MGT201 Mid Term Papers More Than (10) BY http://www.vustudents.net MIDTERM EXAMINATION MGT201- Financial Management (Session - 2) Question No: 1 ( Marks: 1 ) - Please choose one Why companies
More informationIntroduction to Discounted Cash Flow
Introduction to Discounted Cash Flow Professor Sid Balachandran Finance and Accounting for Non-Financial Executives Columbia Business School Agenda Introducing Discounted Cashflow Applying DCF to Evaluate
More informationMGT201 Financial Management All Subjective and Objective Solved Midterm Papers for preparation of Midterm Exam2012 Question No: 1 ( Marks: 1 ) - Please choose one companies invest in projects with negative
More informationEngineering Economics and Financial Accounting
Engineering Economics and Financial Accounting Unit 5: Accounting Major Topics are: Balance Sheet - Profit & Loss Statement - Evaluation of Investment decisions Average Rate of Return - Payback Period
More informationCapital Budgeting, Part I
Capital Budgeting, Part I Lakehead University Fall 2004 Capital Budgeting Techniques 1. Net Present Value 2. The Payback Rule 3. The Average Accounting Return 4. The Internal Rate of Return 5. The Profitability
More informationCapital Budgeting, Part I
Capital Budgeting, Part I Lakehead University Fall 2004 Capital Budgeting Techniques 1. Net Present Value 2. The Payback Rule 3. The Average Accounting Return 4. The Internal Rate of Return 5. The Profitability
More informationACCTG101 Revision MODULES 10 & 11 LITTLE NOTABLES EXCLUSIVE - VICKY TANG
ACCTG101 Revision MODULES 10 & 11 TIME VALUE OF MONEY & CAPITAL INVESTMENT MODULE 10 TIME VALUE OF MONEY Time Value of Money is the concept that cash flows of dollar amounts have different values at different
More informationINVESTMENT APPRAISAL TECHNIQUES FOR SMALL AND MEDIUM SCALE ENTERPRISES
SAMUEL ADEGBOYEGA UNIVERSITY COLLEGE OF MANAGEMENT AND SOCIAL SCIENCES DEPARTMENT OF BUSINESS ADMINISTRATION COURSE CODE: BUS 413 COURSE TITLE: SMALL AND MEDIUM SCALE ENTERPRISE MANAGEMENT SESSION: 2017/2018,
More informationChapter 11: Capital Budgeting: Decision Criteria
11-1 Chapter 11: Capital Budgeting: Decision Criteria Overview and vocabulary Methods Payback, discounted payback NPV IRR, MIRR Profitability Index Unequal lives Economic life 11-2 What is capital budgeting?
More informationFinancial Analysis Refresher
Financial Analysis Refresher Spring 2017 CE Conference Mark Myles - TURI Financial Analysis Requirements Economic Evaluation of Potential TUR Techniques (310 CMR 50.46A) The TUR plan must include the discount
More informationChapter 7: Investment Decision Rules
Chapter 7: Investment Decision Rules-1 Chapter 7: Investment Decision Rules I. Introduction and Review of NPV A. Introduction Q: How decide which long-term investment opportunities to undertake? Key =>
More informationChapter 9. Capital Budgeting Decision Models
Chapter 9 Capital Budgeting Decision Models Learning Objectives 1. Explain capital budgeting and differentiate between short-term and long-term budgeting decisions. 2. Explain the payback model and its
More informationMeasuring Investment Returns
Measuring Investment Returns Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle
More informationCS 413 Software Project Management LECTURE 8 COST MANAGEMENT FOR SOFTWARE PROJECT - II CASH FLOW ANALYSIS TECHNIQUES
LECTURE 8 COST MANAGEMENT FOR SOFTWARE PROJECT - II CASH FLOW ANALYSIS TECHNIQUES PAYBACK PERIOD: The payback period is the length of time it takes the company to recoup the initial costs of producing
More informationCopyright Disclaimer under Section 107 of the Copyright Act 1976, allowance is made for "fair use" for purposes such as criticism, comment, news
Copyright Disclaimer under Section 107 of the Copyright Act 1976, allowance is made for "fair use" for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use
More informationCPET 581 Smart Grid and Energy Management Nov. 20, 2013 Lecture
CPET 581 Smart Grid and Energy Management Nov. 20, 2013 Lecture References [ 1] Mechanical and Electrical Systems in Building, 5 th Edition, by Richard R. Janis and William K.Y. Tao, Publisher Pearson
More informationUniversity 18 Lessons Financial Management. Unit 2: Capital Budgeting Decisions
University 18 Lessons Financial Management Unit 2: Capital Budgeting Decisions Nature of Investment Decisions The investment decisions of a firm are generally known as the capital budgeting, or capital
More informationMGT201 Lecture No. 11
MGT201 Lecture No. 11 Learning Objectives: In this lecture, we will discuss some special areas of capital budgeting in which the calculation of NPV & IRR is a bit more difficult. These concepts will be
More informationCommercestudyguide.com Capital Budgeting. Definition of Capital Budgeting. Nature of Capital Budgeting. The process of Capital Budgeting
Commercestudyguide.com Capital Budgeting Capital Budgeting decision is considered the most important and most critical decision for a finance manager. It involves decisions related to long-term investments
More informationStudy Session 11 Corporate Finance
Study Session 11 Corporate Finance ANALYSTNOTES.COM 1 A. An Overview of Financial Management a. Agency problem. An agency relationship arises when: The principal hires an agent to perform some services.
More informationMBF1223 Financial Management Prepared by Dr Khairul Anuar
MBF1223 Financial Management Prepared by Dr Khairul Anuar L7 - Capital Budgeting Decision Models www.mba638.wordpress.com Learning Objectives 1. Explain capital budgeting and differentiate between short-term
More informationACCT 102 Fundamentals of Accounting II Chapter 24 Capital Budgeting and Investment Analysis
ACCT 102 Fundamentals of Accounting II Chapter 24 Capital Budgeting and Investment Analysis METHOD ADVANTAGES DISADVANTAGES Average Rate of Return Cash Payback Net Present Value Internal Rate of Return
More informationMULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet.
M I M E 3 1 0 E N G I N E E R I N G E C O N O M Y Class Test #2 Thursday, 23 March, 2006 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY
More informationFinancial Management Masters of Business Administration Study Notes & Tutorial Questions Chapter 3: Investment Decisions
Financial Management Masters of Business Administration Study Notes & Tutorial Questions Chapter 3: Investment Decisions 1 INTRODUCTION The word Capital refers to be the total investment of a company of
More informationLecture 3. Chapter 4: Allocating Resources Over Time
Lecture 3 Chapter 4: Allocating Resources Over Time 1 Introduction: Time Value of Money (TVM) $20 today is worth more than the expectation of $20 tomorrow because: a bank would pay interest on the $20
More informationAFP Financial Planning & Analysis Learning System Session 1, Monday, April 3 rd (9:45-10:45) Time Value of Money and Capital Budgeting
AFP Financial Planning & Analysis Learning System Session 1, Monday, April 3 rd (9:45-10:45) Time Value of Money and Capital Budgeting Chapters Covered Time Value of Money: Part I, Domain B Chapter 6 Net
More informationLecture Guide. Sample Pages Follow. for Timothy Gallagher s Financial Management 7e Principles and Practice
Lecture Guide for Timothy Gallagher s Financial Management 7e Principles and Practice 707 Slides Written by Tim Gallagher the textbook author Use as flash cards for terminology and concept review Also
More informationReview of Financial Analysis Terms
Review of Financial Analysis Terms Financial Analysis Requirements Economic Evaluation of Potential TUR Techniques (310 CMR 50.46A) The TUR plan must include the discount rate, cost of capital, depreciation
More informationInternational Project Management. prof.dr MILOŠ D. MILOVANČEVIĆ
International Project Management prof.dr MILOŠ D. MILOVANČEVIĆ Project Evaluation and Analysis Project Financial Analysis Project Evaluation and Analysis The important aspects of project analysis are:
More informationThe formula for the net present value is: 1. NPV. 2. NPV = CF 0 + CF 1 (1+ r) n + CF 2 (1+ r) n
Lecture 6: Capital Budgeting 1 Capital budgeting refers to an investment into a long term asset. It must be noted that all investments have a cost and that investments should always have benefits such
More informationYou will also see that the same calculations can enable you to calculate mortgage payments.
Financial maths 31 Financial maths 1. Introduction 1.1. Chapter overview What would you rather have, 1 today or 1 next week? Intuitively the answer is 1 today. Even without knowing it you are applying
More informationThe nature of investment decision
The nature of investment decision Investment decisions must be consistent with the objectives of the particular organization. In private-sector business, maximizing the wealth of the owners is normally
More informationThe Basics of Capital Budgeting
Chapter 11 The Basics of Capital Budgeting Should we build this plant? 11 1 What is capital budgeting? Analysis of potential additions to fixed assets. Long term decisions; involve large expenditures.
More informationCapital Budgeting Process and Techniques 93. Chapter 7: Capital Budgeting Process and Techniques
Capital Budgeting Process and Techniques 93 Answers to questions Chapter 7: Capital Budgeting Process and Techniques 7-. a. Type I error means rejecting a good project. Payback could lead to Type errors
More informationEntrepreneurship Module 3 Entrepreneurial Finance - Sachin Sadare
Entrepreneurship Module 3 Entrepreneurial Finance - Sachin Sadare Module 3 Entrepreneurial Finance Key Financial Statements Financial Budgets Agenda Capital Budgeting Financial Ratios Key Financial Statements
More informationMonetary Economics Valuation: Cash Flows over Time. Gerald P. Dwyer Fall 2015
Monetary Economics Valuation: Cash Flows over Time Gerald P. Dwyer Fall 2015 WSJ Material to be Studied This lecture, Chapter 6, Valuation, in Cuthbertson and Nitzsche Next topic, Chapter 7, Cost of Capital,
More informationAnalyzing Project Cash Flows. Principles Applied in This Chapter. Learning Objectives. Chapter 12. Principle 3: Cash Flows Are the Source of Value.
Analyzing Project Cash Flows Chapter 12 1 Principles Applied in This Chapter Principle 3: Cash Flows Are the Source of Value. Principle 5: Individuals Respond to Incentives. Learning Objectives 1. Identify
More informationCAPITAL BUDGETING Shenandoah Furniture, Inc.
CAPITAL BUDGETING Shenandoah Furniture, Inc. Shenandoah Furniture is considering replacing one of the machines in its manufacturing facility. The cost of the new machine will be $76,120. Transportation
More informationMGT201 Current Online Solved 100 Quizzes By
MGT201 Current Online Solved 100 Quizzes By http://vustudents.ning.com Question # 1 Which if the following refers to capital budgeting? Investment in long-term liabilities Investment in fixed assets Investment
More informationLesson 7 and 8 THE TIME VALUE OF MONEY. ACTUALIZATION AND CAPITALIZATION. CAPITAL BUDGETING TECHNIQUES
Lesson 7 and 8 THE TIME VALUE OF MONEY. ACTUALIZATION AND CAPITALIZATION. CAPITAL BUDGETING TECHNIQUES Present value A dollar tomorrow is worth less than a dollar today. Why? 1) Present consumption preferred
More informationDOWNLOAD PDF ANALYZING CAPITAL EXPENDITURES
Chapter 1 : Capital Expenditure (Capex) - Guide, Examples of Capital Investment The first step in a capital expenditure analysis is a factual evaluation of the current situation. It can be a simple presentation
More informationCAPITAL BUDGETING AND THE INVESTMENT DECISION
C H A P T E R 1 2 CAPITAL BUDGETING AND THE INVESTMENT DECISION I N T R O D U C T I O N This chapter begins by discussing some of the problems associated with capital asset decisions, such as the long
More informationCapital Budgeting CFA Exam Level-I Corporate Finance Module Dr. Bulent Aybar
Capital Budgeting CFA Exam Level-I Corporate Finance Module Dr. Bulent Aybar Professor of International Finance Capital Budgeting Agenda Define the capital budgeting process, explain the administrative
More informationChapter 6 Making Capital Investment Decisions
Making Capital Investment Decisions Solutions to Even-Numbered Problems and Cases 6.2 Manitoba Railroad Limited (MRL) (a) Discount Rate 7% Cash Cash Net Cash Cumulative Year Outflows Inflows Flows Cash
More informationCA. Sonali Jagath Prasad ACA, ACMA, CGMA, B.Com.
MANAGEMENT OF FINANCIAL RESOURCES AND PERFORMANCE SESSIONS 3& 4 INVESTMENT APPRAISAL METHODS June 10 to 24, 2013 CA. Sonali Jagath Prasad ACA, ACMA, CGMA, B.Com. WESTFORD 2008 Thomson SCHOOL South-Western
More informationSoftware Economics. Introduction to Business Case Analysis. Session 2
Software Economics Introduction to Business Case Analysis Session 2 Today Last Session we covered FV, PV and NPV We started with setting up the financials of a Business Case We talked about measurements
More informationNet Present Value Q: Suppose we can invest $50 today & receive $60 later today. What is our increase in value? Net Present Value Suppose we can invest
Ch. 11 The Basics of Capital Budgeting Topics Net Present Value Other Investment Criteria IRR Payback What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve
More informationWHAT IS CAPITAL BUDGETING?
WHAT IS CAPITAL BUDGETING? Capital budgeting is a required managerial tool. One duty of a financial manager is to choose investments with satisfactory cash flows and rates of return. Therefore, a financial
More informationThe Cash Payback Period
Accounting presentation created by Rex A Schildhouse 2015-01-01 www.schildhouse.com Created by Rex A Schildhouse, www.schildhouse.com Slide 1 The Cash Payback Period is a quick and dirty, non-scientific
More informationSession 1, Monday, April 8 th (9:45-10:45)
Session 1, Monday, April 8 th (9:45-10:45) Time Value of Money and Capital Budgeting v2.0 2014 Association for Financial Professionals. All rights reserved. Session 3-1 Chapters Covered Time Value of Money:
More informationCHAPTER 2 LITERATURE REVIEW
CHAPTER 2 LITERATURE REVIEW Capital budgeting is the process of analyzing investment opportunities and deciding which ones to accept. (Pearson Education, 2007, 178). 2.1. INTRODUCTION OF CAPITAL BUDGETING
More informationCHAPTER 4. The Time Value of Money. Chapter Synopsis
CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money
More informationTopics in Corporate Finance. Chapter 2: Valuing Real Assets. Albert Banal-Estanol
Topics in Corporate Finance Chapter 2: Valuing Real Assets Investment decisions Valuing risk-free and risky real assets: Factories, machines, but also intangibles: patents, What to value? cash flows! Methods
More informationMid Term Papers. Spring 2009 (Session 02) MGT201. (Group is not responsible for any solved content)
Spring 2009 (Session 02) MGT201 (Group is not responsible for any solved content) Subscribe to VU SMS Alert Service To Join Simply send following detail to bilal.zaheem@gmail.com Full Name Master Program
More informationanagena Accounting McGraw-Hill Irwin Ray H. Garrison, D.B.A., CPA Eric W. Noreen, Ph.D., CMA Peter C. Brewer, Ph.D., CPA
anagena Accounting r t e e n t i t i Ray H. Garrison, D.B.A., CPA Professor Emeritus Brigham Young University Eric W. Noreen, Ph.D., CMA Professor Emeritus University of Washington Peter C. Brewer, Ph.D.,
More informationBFC2140: Corporate Finance 1
BFC2140: Corporate Finance 1 Table of Contents Topic 1: Introduction to Financial Mathematics... 2 Topic 2: Financial Mathematics II... 5 Topic 3: Valuation of Bonds & Equities... 9 Topic 4: Project Evaluation
More information1 INVESTMENT DECISIONS,
1 INVESTMENT DECISIONS, PROJECT PLANNING AND CONTROL THIS CHAPTER INCLUDES Estimation of Project Cash Flow Relevant Cost Analysis for Projects Project Appraisal Methods DCF and Non-DCF Techniques Capital
More informationChapter 7. Net Present Value and Other Investment Rules
Chapter 7 Net Present Value and Other Investment Rules Be able to compute payback and discounted payback and understand their shortcomings Understand accounting rates of return and their shortcomings Be
More informationSoftware Economics. Metrics of Business Case Analysis
Software Economics Metrics of Business Case Analysis 2 Mida tähendab kahulik? A. Cloudy B. Poetic word for useful C. Hairy D. Slightly frozen Kui pikk on ajastaeg? A. One day B. One month C. One year D.
More informationRULE OF TIME VALUE OF MONEY
RULE OF TIME VALUE OF MONEY 1. CMPD : a. We can set our calculator either begin mode or end mode when we don t use pmt. We can say that in case of using n, I, pv, fv, c/y we can set out calculator either
More informationMGT201 - Financial Management FAQs By
MGT201 - Financial Management FAQs By Explain me in detail with example what is "double taxation"? Answer: Double taxation occurs when tax is paid more than once on the same taxable income or asset. For
More information11. Large versus small decisions: long run
11. Large versus small decisions: long run Focus: decisions with long run consequences Small and large decisions differ with regard to Degree of variation on the status quo (do LLAs hold?) Degree of interaction
More informationChapter Organization. Net present value (NPV) is the difference between an investment s market value and its cost.
Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization 9.1. Net present value 9.2. The Payback Rule 9.3. The Discounted Payback 9.4. The Average Accounting Return 9.6. The Profitability
More informationFinancial Management Bachelors of Business Administration Study Notes & Tutorial Questions Chapter 1: Investment & Project Appraisal
Financial Management Bachelors of Business Administration Study Notes & Tutorial Questions Chapter 1: Investment & Project Appraisal Ibrahim Sameer AVID College Page 1 INTRODUCTION Capital budgeting is
More informationFinancial Management I
Financial Management I Workshop on Time Value of Money MBA 2016 2017 Slide 2 Finance & Valuation Capital Budgeting Decisions Long-term Investment decisions Investments in Net Working Capital Financing
More informationch11 Student: 3. An analysis of what happens to the estimate of net present value when only one variable is changed is called analysis.
ch11 Student: Multiple Choice Questions 1. Forecasting risk is defined as the: A. possibility that some proposed projects will be rejected. B. process of estimating future cash flows relative to a project.
More informationNote: it is your responsibility to verify that this examination has 16 pages.
UNIVERSITY OF MANITOBA Faculty of Management Department of Accounting and Finance 9.0 Corporation Finance Professors: A. Dua, J. Falk, and R. Scott February 8, 006; 6:30 p.m. - 8:30 p.m. Note: it is your
More informationThe following points highlight the three time-adjusted or discounted methods of capital budgeting, i.e., 1. Net Present Value
Discounted Methods of Capital Budgeting Financial Analysis The following points highlight the three time-adjusted or discounted methods of capital budgeting, i.e., 1. Net Present Value Method 2. Internal
More informationTime value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee
Time value of money-concepts and Calculations Prof. Bikash Mohanty Department of Chemical Engineering Indian Institute of Technology, Roorkee Lecture - 01 Introduction Welcome to the course Time value
More informationAn Introduction to Capital Budgeting Methods
An Introduction to Capital Budgeting Methods Econ 466 Spring, 2010 Chapters 9 and 10 Consider the following choice You have an opportunity to invest $20,000 in one of the following capital assets. You
More informationSoftware Economics. Introduction to Business Case Analysis. Session 1
Software Economics Introduction to Business Case Analysis Session 1 Who am I? Sweden PhD Student in Computer Science (Business Process Management) Masters in Business Administration Worked with development
More informationSession 02. Investment Decisions
Session 02 Investment Decisions Programme : Executive Diploma in Accounting, Business & Strategy (EDABS 2017) Course : Corporate Financial Management (EDABS 202) Lecturer : Mr. Asanka Ranasinghe MBA (Colombo),
More informationChapter 9. Net Present Value and Other Investment Criteria. Dongguk University, Prof. Sun-Joong Yoon
Chapter 9. Net Present Value and Other Investment Criteria Dongguk University, Prof. Sun-Joong Yoon Outline Net Present Value The Payback Rule The Discounted Payback The Average Accounting Return The Internal
More informationDisclaimer: This resource package is for studying purposes only EDUCATIO N
Disclaimer: This resource package is for studying purposes only EDUCATIO N Chapter 9: Budgeting The Basic Framework of Budgeting Master budget - a summary of a company s plans in which specific targets
More informationSeminar on Financial Management for Engineers. Institute of Engineers Pakistan (IEP)
Seminar on Financial Management for Engineers Institute of Engineers Pakistan (IEP) Capital Budgeting: Techniques Presented by: H. Jamal Zubairi Data used in examples Project L Project L Project L Project
More informationCMA Part 2. Financial Decision Making
CMA Part 2 Financial Decision Making SU 8.1 The Capital Budgeting Process Capital budgeting is the process of planning and controlling investment for long-term projects. Will affect the company for many
More informationMENG 547 Energy Management & Utilization
MENG 547 Energy Management & Utilization Chapter 4 Economic Decisions for Energy Projects Prof. Dr. Ugur Atikol, cea Director of EMU Energy Research Centre The Need for Economic Analysis The decision on
More informationTypes of investment decisions: 1) Independent projects Projects that, if accepted or rejects, will not affect the cash flows of another project
Week 4: Capital Budgeting Capital budgeting is an analysis of potential additions to fixed assets, long-term decisions involving large expenditures and is very important to a firm s future Therefore capital
More informationIE2140 Engineering Economy Tutorial 3 (Lab 1) Using Excel Financial Functions for Project Evaluation
IE2140 Engineering Economy Tutorial 3 (Lab 1) Using Excel Financial Functions for Project Evaluation 1. Objectives and Overview Solutions Guide by Hong Lanqing, Wang Xin and Mei Wenjie The objective of
More informationLecture 5 Present-Worth Analysis
Seg2510 Management Principles for Engineering Managers Lecture 5 Present-Worth Analysis Department of Systems Engineering and Engineering Management The Chinese University of Hong Kong 1 Part I Review
More information