Capital Budgeting Decision Methods
|
|
- Virgil Bishop
- 5 years ago
- Views:
Transcription
1 Capital Budgeting Decision Methods 1
2 Learning Objectives The capital budgeting process. Calculation of payback, NPV, IRR, and MIRR for proposed projects. Capital rationing. Measurement of risk in capital budgeting and how to deal with it. 2
3 The Capital Budgeting Process Capital Budgeting is the process of evaluating proposed investment projects for a firm. Managers must determine which projects are acceptable and must rank mutually exclusive projects by order of desirability to the firm. 3
4 The Accept/Reject Decision Four methods: Payback Period years to recoup the initial investment Net Present Value (NPV) change in value of firm if project is under taken Internal Rate of Return (IRR) projected percent rate of return project will earn Modified Internal Rate of Return (MIRR) 4
5 Capital Budgeting Methods Consider Projects A and B that have the following expected cashflows? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 5
6 Capital Budgeting Methods What is the payback for Project A? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 6
7 Capital Budgeting Methods What is the payback for Project A? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) Cumulative CF 3,500-6,500 3,500-3,000 3, ,500 7
8 Capital Budgeting Methods What is the payback for Project A? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 Payback in 2.9 years (10,000) Cumulative CF 3,500-6,500 3,500-3,000 3, ,500 8
9 Capital Budgeting Methods What is the payback for Project B? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 (10,000) ,600 10,000 9
10 Capital Budgeting Methods What is the payback for Project B? P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 Payback in 3.4 years (10,000) Cumulative CF 500-9, ,000 4,600-4,400 10,000 +5,600 10
11 Payback Decision Rule Accept project if payback is less than the company s predetermined maximum. If company has determined that it requires payback in three years or less, then you would: accept Project A reject Project B 11
12 Capital Budgeting Methods Net Present Value Present Value of all costs and benefits (measured in terms of incremental cash flows) of a project. Concept is similar to Discounted Cashflow model for valuing securities but subtracts the cost of the project. 12
13 Capital Budgeting Methods Net Present Value Present Value of all costs and benefits (measured in terms of incremental cash flows) of a project. Concept is similar to Discounted Cashflow model for valuing securities but subtracts of cost of project. NPV = PV of Inflows - Initial Investment CF 1 CF 2 (1+ k) 1 (1+ k) 2. CF n (1+ k ) n NPV = + + Initial Investment 13
14 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000) (10,000) 1 3, , ,500 4, ,500 10, (10,000) ,600 10,000 14
15 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,600 10,000 $500 (1.10) 1 15
16 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,600 10,000 $500 (1.10) 2 16
17 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) , ,600 10,000 $500 (1.10) 2 $4,600 (1.10) 3 17
18 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,456 6, ,600 10,000 $500 (1.10) 2 $4,600 (1.10) 3 $10,000 (1.10) 4 18
19 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,600 10, ,456 6,830 $11,154 19
20 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,456 6,830 $11, ,600 10,000 PV Benefits > PV Costs $11,154 > $ 10,000 20
21 What is the NPV for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) ,600 10, ,456 6,830 $11,154 PV Benefits > PV Costs $11,154 > $ 10,000 - $10,000 = $1,154 = NPV NPV > $0 $1,154 > $0 21
22 Financial Calculator: Additional Keys used to enter Cash Flows and compute the Net Present Value (NPV) 22
23 Financial Calculator: Additional Keys used to enter Cash Flows and compute the Net Present Value (NPV) CF NPV P/YR IRR N I/Y PV PMT FV Key used to enter expected cash flows in order of their receipt. Note: the initial investment (CF 0 ) must be entered as a negative number since it is anoutflow. 23
24 Financial Calculator: Additional Keys used to enter Cash Flows and compute the Net Present Value (NPV) CF NPV P/YR IRR N I/Y PV PMT FV Key used to calculate the net present value of the cashflows that have been entered in the calculator. 24
25 Financial Calculator: Additional Keys used to enter Cash Flows and compute the Net Present Value (NPV) CF NPV P/YR IRR N I/Y PV PMT FV Key used to calculate the internal rate of return for the cashflows that have been entered in the calculator. 25
26 Calculate the NPV for Project B with calculator. CF NPV P/YR IRR N I/Y PV PMT FV P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 26
27 Calculate the NPV for Project B with calculator. CF 0 = -10,000 Keystrokes for TI BAII PLUS: CF /- ENTER CF NPV P/YR IRR N I/Y PV PMT FV 27
28 Calculate the NPV for Project B with calculator. C01 = 500 CF NPV P/YR IRR N I/Y PV PMT FV 500 ENTER Keystrokes for TI BAII PLUS: CF /- ENTER 28
29 Calculate the NPV for Project B with calculator. F01 = 2 CF NPV P/YR IRR N I/Y PV PMT FV Keystrokes for TI BAII PLUS: CF /- ENTER 500 ENTER 2 ENTER F stands for frequency. Enter 2 since there are two adjacent payments of 500 in periods 1 and 2. 29
30 Calculate the NPV for Project B with calculator. Keystrokes for TI BAII PLUS: C02 = 4600 CF NPV P/YR IRR CF /- ENTER 500 ENTER 2 ENTER 4600 ENTER N I/Y PV PMT FV 30
31 Calculate the NPV for Project B with calculator. Keystrokes for TI BAII PLUS: F02 = 1 CF /- ENTER CF NPV P/YR IRR N I/Y PV PMT FV 500 ENTER 2 ENTER 4600 ENTER 1 ENTER 31
32 Calculate the NPV for Project B with calculator. Keystrokes for TI BAII PLUS: C03 = CF NPV P/YR IRR N I/Y PV PMT FV CF /- ENTER 500 ENTER 2 ENTER 4600 ENTER 1 ENTER ENTER 32
33 Calculate the NPV for Project B with calculator. Keystrokes for TI BAII PLUS: F03 = 1 CF NPV P/YR IRR N I/Y PV PMT FV CF /- ENTER 500 ENTER 2 ENTER 4600 ENTER 1 ENTER ENTER 1 ENTER 33
34 Calculate the NPV for Project B with calculator. I = 10 Keystrokes for TI BAII PLUS: NPV 10 ENTER CF NPV P/YR IRR N I/Y PV PMT FV k = 10% 34
35 Calculate the NPV for Project B with calculator. NPV = 1, Keystrokes for TI BAII PLUS: NPV 10 ENTER CF NPV P/YR IRR CPT N I/Y PV PMT FV The net present value of Project B = $1,154 as we calculated previously. 35
36 NPV Decision Rule Accept the project if the NPV is greater than or equal to 0. Example: NPV A = $1,095 NPV B = $1,154 > 0 > 0 Accept Accept If projects are independent, accept both projects. If projects are mutually exclusive, accept the project with the higher NPV. 36
37 Capital Budgeting Methods IRR (Internal Rate of Return) IRR is the discount rate that forces the NPV to equal zero. It is the rate of return on the project given its initial investment and future cash flows. The IRR is the rate earned only if all CFs are reinvested at the IRR rate. 37
38 Calculate the IRR (through trial and error) IRR A 1 - k 1 (1 + k) 4 NPV A = 0 =(3,500 x ) - 10,000 IRR B 500 k =.1496 = 14.96% = IRR A NPV B = 0 = ,000 (1+k) 1 (1+k) 2 (1+k) 3 (1+k) 4 k =.135 = 13.5% = IRR B 38
39 Calculate the IRR for Project B with calculator. CF NPV P/YR IRR N I/Y PV PMT FV P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 39
40 Calculate the IRR for Project B with calculator. IRR = 13.5% CF NPV P/YR IRR N I/Y PV PMT FV P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10,000 Enter CFs as for NPV IRR CPT 40
41 IRR Decision Rule Accept the project if the IRR is greater than or equal to the required rate of return (k). Reject the project if the IRR is less than the required rate of return (k). Example: k = 10% IRR A = 14.96% > 10% > 10% Accept Accept 41 IRR B = 13.50%
42 Capital Budgeting Methods MIRR (Modified Internal Rate of Return) This is the discount rate which causes the project s PV of the outflows to equal the project s TV (terminal value) of the inflows. PV outflow = TV inflows (1 + MIRR) n Assumes cash inflows are reinvested at k, the cost of capital. MIRR avoids the problem of multiple IRRs (described later). 42
43 What is the MIRR for Project B? k=10% P R O J E C T Time A B 0 (10,000.) (10,000.) 1 3, , ,500 4, ,500 10, (10,000) (10,000)/(1.10) ,600 10, (1.10) 3 500(1.10) 2 4,600(1.10) 1 10,000(1.10) 0 10,000 5,060 (10,000) 10,000 = 16,331 (1 + MIRR) , MIRR =.1305 = 13.05%
44 Calculate the MIRR for Project B with calculator. Step 1. Calculate NPV using cash inflows Keystrokes for TI BAII PLUS: CF 0 +/- ENTER 500 ENTER 2 ENTER 4600 ENTER CF NPV P/YR IRR 1 ENTER N I/Y PV PMT FV ENTER 1 ENTER 44
45 Calculate the MIRR for Project B with calculator. Step 1. Calculate NPV using cash inflows Keystrokes for TI BAII PLUS: NPV = 11,154 NPV 10 ENTER CF NPV P/YR IRR CPT N I/Y PV PMT FV The net present value of Project B cash inflows = $11,154 (use as PV) 45
46 Calculate the MIRR for Project B with calculator. Step 2. Calculate FV of cash inflows using previous NPV This is the Terminal Value Calculator Enter: N = 4 I/YR = 10 PV = PMT = 0 CPT FV =? FV = 16,331 CF NPV P/YR IRR N I/Y PV PMT FV 46
47 Calculate the MIRR for Project B with calculator. Step 3. Calculate MIRR using PV of outflows and calculated Terminal Value. Calculator Enter: N = 4 PV = PMT = 0 FV = CPT I/YR =?? MIRR CF NPV P/YR IRR N I/Y PV PMT FV 47
48 Calculate NPV and IRR for Project A NPV = $1, IRR = 14.96% Which project(s) should the firm accept? NPV IRR A $1, % B $1, % 48
49 NPV/IRR Decision Rules IRR Project A > IRR Project B NPV Project B > NPV Project A If projects A & B are independent, accept both projects If projects A & B are mutually exclusive, there is a ranking conflict. 49
50 Net Present Value Profile Graphs the Net Present Value of the project with different required rates 6,000 N P V 3,000 Project A P R O J E C T Time A B 0 (10,000) (10,000) 1 3, , ,500 4, ,500 10, % Cost of Capital 10% 15% 20% Intersects the X axis at the IRR 50
51 Risk in Capital Budgeting Project risk needs to be considered in comparing projects with different levels of risk. The discount rate can be adjusted for risk when NPV is used to evaluate projects. The hurdle rate can be adjusted when IRR is used to evaluate projects. 51
52 Net Present Value Profile Graphs the Net Present Value of the project with different required rates 6,000 N P V 3,000 Project B P R O J E C T Time A B 0 (10,000) (10,000) 1 3, , ,500 4, ,500 10, % 10% 15% Cost of Capital 20% Intersects the X axis at the IRR 52
53 Crossover Point There is a ranking conflict between NPV and IRR to the left of the crossover point. N P V 6,000 Project B Crossover point 3,000 Project A 0 Cost of Capital 5% 10% 15% 20% 53
54 What is capital rationing? Capital rationing is the practice of placing a dollar limit on the total size of the capital budget. This practice may not be consistent with maximizing shareholder value but may be necessary for other reasons. Choose between projects by selecting the combination of projects that yields the highest total NPV without 54 exceeding the capital budget limit.
55 Measurement of Project Risk Calculate the coefficient of variation of returns of the firm s asset portfolio with the project and without it. This can be done by following a five step process. Observe the following example. 55
56 Measurement of Project Risk Step 1: Find the CV of the Existing Portfolio Assume Company X has an existing rate of return of 6% and standard deviation of 2%. CV= Standard Deviation Mean, or expected value = =.3333, or 33.33% 56
57 Measurement of Project Risk Step 2: Find the Expected return of the New Portfolio (Existing plus Proposed) Assume the New Project (Y) has an IRR of 5.71% and a Standard Deviation of 2.89% Assume further that Project Y will account for 10% of X s overall investment. E(R p ) = (w x x E(R x )) + (w y x E(R y )) = (.10 x.0571) + (.90 x.06) = =.05971, or 5.971% 57
58 Measurement of Project Risk Step 3: Find the Standard Deviation of the New Portfolio (Existing plus Proposed). Assume the proposed is uncorrelated with the existing project. r xy = 0 σ [w x2 σ x2 + w y2 σ y2 + 2w x w y r xy σ x σ y ] 1/2 p = = [(.10 2 )( ) + (.90 2 )(.02 2 ) + (2)(.10)(.90)(0.0)(.0289)(02)] 1/2 = [(.01)( ) + (.81)(.0004) + 0] 1/2 = [ ] 1/2 = [ ] 1/2 =.0182, or 1.82% 58
59 Measurement of Project Risk Step 4: Find the CV of the New Portfolio (Existing plus Proposed) CV= Standard Deviation Mean, or expected value = =.3048, or 30.48% 59
60 Measurement of Project Risk Step 5: Compare the CV of the portfolio with and without the Proposed Project. The difference between the two coefficients of variation is the measure of risk of the capital budgeting project. CV without Y CV with Y Change in CV 33.33% 30.48%
61 Comparing risky projects using risk adjusted discount rates (RADRs) Firms often compensate for risk by adjusting the discount rate used to calculate NPV. Higher risk, use a higher discount rate. Lower risk, use a lower discount rate The risk adjusted discount rate (RADR) can also be used as a risk adjusted hurdle rate for IRR comparisons. 61
62 Non-simple Projects Non-simple projects have one or more negative future cash flows after the initial investment. 62
63 Non-simple projects How would a negative cash flow in year 4 affect Project Z s NPV? k=10% (10,000) 5,000 5,000 5,000-6,000 4,545 4,132 3,757-4,098 8,336 - $10,000 = -$1,664 NPV Project Z should be rejected in this case. 63
64 Multiple IRRs Some non-simple projects may have more than one discount rate that results in an NPV of zero (IRRs). Example: Cash Flows: t o : (160,000) t 1 : 1,000,000 t 2 : (1,000,000) 64
65 Multiple IRRs When k=25% $1,000,000 - $1,000,000 - $160,000 (1+.25) 1 (1+.25) 2 = $800,000 - $640,000 - $160,000 NPV= $0 Note: When k =.25, the NPV = 0 65
66 Multiple IRRs When k=400% $1,000,000 - $1,000,000 - $160,000 (1+4.00) 1 (1+4.00) 2 = $200,000 - $40,000 - $160,000 NPV = 0 Note: When k = 4.00, the NPV also = 0 THIS PROJECT HAS TWO IRRS!!! 66
67 Multiple IRRs Non-simple projects may have, but do not have to have, as many IRRs as there are sign changes. If a project has more than one IRR, use the NPV method for project accept/reject decisions. 67
68 Mutually Exclusive Projects With Unequal Lives Mutually exclusive projects with unequal project lives can be compared by using two methods: Replacement Chain Equivalent Annual Annuity 68
69 Replacement Chain Approach Assumes each project can be replicated until a common period of time has passed, allowing the projects to be compared. Example Project Cheap Talk has a 3-year life, with an NPV of $4,424. Project Rolles Voice has a 12-year life, 69 with an NPV of $4,510.
70 Replacement Chain Approach Project Cheap Talk could be repeated four times during the life of Project Rolles Voice. The NPVs of Project Cheap Talk, in years t 3, t 6, and t 9,are discounted back to year t 0. 70
71 Replacement Chain Approach The NPVs of Project Cheap Talk, in years t 3, t 6, and t 9, are discounted back to year t 0, which results in an NPV of $12,121. k=10% ,424 4,424 4,424 4,424 3,324 2,497 1,876 12,121 71
72 Equivalent Annual Annuity Amount of the annuity payment that would equal the same NPV as the actual future cash flows of a project. EAA = NPV PVIFA k,n 72
73 Equivalent Annual Annuity Project Cheap Talk $4,244 ((1-(1.1) -3 ) /.1) = $ Project Rolles Voice $4,510 ((1-(1.1) -12 ) /.1) = $
Lecture 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 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 informationCapital Budgeting Decision Methods
Capital Budgeting Decision Methods Everything is worth what its purchaser will pay for it. Publilius Syrus In April of 2012, before Facebook s initial public offering (IPO), it announced it was acquiring
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 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 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 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 informationWhat s next? Chapter 7. Topic Overview. Net Present Value & Other Investment Criteria
What s next? Capital Budgeting: involves making decisions about real asset investments. Chapter 7: Net Present Value and Other Investment Criteria Chapter 8: Estimating cash flows for a potential investment.
More informationCAPITAL BUDGETING TECHNIQUES (CHAPTER 9)
CAPITAL BUDGETING TECHNIQUES (CHAPTER 9) Capital budgeting refers to the process used to make decisions concerning investments in the long-term assets of the firm. The general idea is that a firm s capital,
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 informationCorporate Financial Management
Corporate Financial Management Professor James J. Barkocy There are three kinds of people: the ones that can count and the ones that can t. McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies,
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 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 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 informationWeek 1 FINC $260,000 $106,680 $118,200 $89,400 $116,720. Capital Budgeting Analysis
Dr. Ahmed FINC 5880 Week 1 Name Capital Budgeting Analysis Facts: Calculations Cost $200,000 Shipping $10,000 Installation $30,000 Depreciable cost $24,000 Inventories will rise by $25,000 Payables will
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Learning Objectives LO1 How to compute the net present value and why it is the best decision criterion. LO2 The payback rule and some of its shortcomings.
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 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 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 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 informationGiven the following information, what is the WACC for the following firm?
Chapter 1 Cost of Capital The required return for an asset is a function of the risk of the asset and the return to the investor is the same as the cost to the company. The firms cost of capital provides
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 informationPrinciples of Managerial Finance Solution Lawrence J. Gitman CHAPTER 10. Risk and Refinements In Capital Budgeting
Principles of Managerial Finance Solution Lawrence J. Gitman CHAPTER 10 Risk and Refinements In Capital Budgeting INSTRUCTOR S RESOURCES Overview Chapters 8 and 9 developed the major decision-making aspects
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 informationCA - FINAL 1.1 Capital Budgeting LOS No. 1: Introduction Capital Budgeting is the process of Identifying & Evaluating capital projects i.e. projects where the cash flows to the firm will be received
More informationCHAPTER 11. Topics. Cash Flow Estimation and Risk Analysis. Estimating cash flows: Relevant cash flows Working capital treatment
CHAPTER 11 Cash Flow Estimation and Risk Analysis 1 Topics Estimating cash flows: Relevant cash flows Working capital treatment Risk analysis: Sensitivity analysis Scenario analysis Simulation analysis
More informationFINANCE FOR EVERYONE SPREADSHEETS
FINANCE FOR EVERYONE SPREADSHEETS Some Important Stuff Make sure there are at least two decimals allowed in each cell. Otherwise rounding off may create problems in a multi-step problem Always enter 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 informationMULTIPLE-CHOICE QUESTIONS Circle the correct answers on this test paper and record them on the computer answer sheet.
#18: /10 #19: /9 Total: /19 VERSION 1 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 Wednesday, 12 November, 2008 90 minutes PRINT your family name / initial and record your student ID
More informationCHAPTER 11. Proposed Project Data. Topics. Cash Flow Estimation and Risk Analysis. Estimating cash flows:
CHAPTER 11 Cash Flow Estimation and Risk Analysis 1 Topics Estimating cash flows: Relevant cash flows Working capital treatment Inflation Risk Analysis: Sensitivity Analysis, Scenario Analysis, and Simulation
More informationAppendix 4B Using Financial Calculators
Chapter 4 Discounted Cash Flow Valuation 4B-1 Appendix 4B Using Financial Calculators This appendix is intended to help you use your Hewlett-Packard or Texas Instruments BA II Plus financial calculator
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 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 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 informationLesson FA xx Capital Budgeting Part 2C
- - - - - - Cover Page - - - - - - Lesson FA-20-170-xx Capital Budgeting Part 2C These notes and worksheets accompany the corresponding video lesson available online at: Permission is granted for educators
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 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 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 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 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 informationSample Questions for Chapters 10 & 11
Name: Class: Date: Sample Questions for Chapters 10 & 11 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Sacramento Paper is considering
More informationFinance 303 Financial Management Review Notes for Final. Chapters 11&12
Finance 303 Financial Management Review Notes for Final Chapters 11&12 Capital budgeting Project classifications Capital budgeting techniques (5 approaches, concepts and calculations) Cash flow estimation
More informationFINANCIAL DECISION RULES FOR PROJECT EVALUATION SPREADSHEETS
FINANCIAL DECISION RULES FOR PROJECT EVALUATION SPREADSHEETS This note is some basic information that should help you get started and do most calculations if you have access to spreadsheets. You could
More informationChapter 9 Net Present Value and Other Investment Criteria. Net Present Value (NPV) Net Present Value (NPV) Konan Chan. Financial Management, Fall 2018
Chapter 9 Net Present Value and Other Investment Criteria Konan Chan Financial Management, Fall 2018 Topics Covered Investment Criteria Net Present Value (NPV) Payback Period Discounted Payback Average
More information2, , , , ,220.21
11-7 a. Project A: CF 0-6000; CF 1-5 2000; I/YR 14. Solve for NPV A $866.16. IRR A 19.86%. MIRR calculation: 0 14% 1 2 3 4 5-6,000 2,000 (1.14) 4 2,000 (1.14) 3 2,000 (1.14) 2 2,000 1.14 2,000 2,280.00
More informationAll rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher.
Taken from: Foundations of Finance: The Logic and Practice of Financial Management, Fourth Edition by Arthur J. Keown, John D. Martin, J. William Petty, David F. Scott, Jr. Copyright 2003, 2001, 1998,
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 informationChapter 8. Ross, Westerfield and Jordan, ECF 4 th ed 2004 Solutions
Ross, Westerfield and Jordan, ECF 4 th ed 2004 Solutions Chapter 8. Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project s life means that the NPV is positive
More informationAsset Valuation Models Capital Budgeting Criteria Problem Set Boise State EMBA Byers
Asset Valuation Models Capital Budgeting Criteria Problem Set Boise State EMBA Byers Remember this is an individual assignment. You should start with a blank spreadsheet. Deliverable: submit your spreadsheet
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 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 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 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 informationTools and Techniques for Economic/Financial Analysis of Projects
Lecture No 12 /13 PCM Tools and Techniques for Economic/Financial Analysis of Projects Project Evaluation: Alternative Methods Payback Period (PBP) Internal Rate of Return (IRR) Net Present Value (NPV)
More informationTHE BASICS OF CAPITAL BUDGETING
C H A P T E 11 R THE BASICS OF CAPITAL BUDGETING Competition in the Aircraft Industry In early 2005 Boeing was involved in a titanic struggle with European consortium Airbus SAS for dominance of the commercial
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 informationFinQuiz Notes
Reading 6 The Time Value of Money Money has a time value because a unit of money received today is worth more than a unit of money to be received tomorrow. Interest rates can be interpreted in three ways.
More informationChapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO END-OF-CHAPTER QUESTIONS 11-1 a. Project cash flow, which is the relevant cash flow for project analysis, represents the actual flow of cash,
More informationCFALA/USC REVIEW MATERIALS USING THE TI-BAII PLUS CALCULATOR
CFALA/USC REVIEW MATERIALS USING THE TI-BAII PLUS CALCULATOR David Cary, PhD, CFA Spring 2019. dcary@dcary.com (helpful if you put CFA Review in subject line) Updated 1/3/2019 Using the TI-BA2+ Notes by
More informationChapter Outline. Problem Types. Key Concepts and Skills 8/27/2009. Discounted Cash Flow. Valuation CHAPTER
8/7/009 Slide CHAPTER Discounted Cash Flow 4 Valuation Chapter Outline 4.1 Valuation: The One-Period Case 4. The Multiperiod Case 4. Compounding Periods 4.4 Simplifications 4.5 What Is a Firm Worth? http://www.gsu.edu/~fnccwh/pdf/ch4jaffeoverview.pdf
More informationCFALA/USC REVIEW MATERIALS USING THE TI-BAII PLUS CALCULATOR. Using the TI-BA2+
CFALA/USC REVIEW MATERIALS USING THE TI-BAII PLUS CALCULATOR David Cary, PhD, CFA Fall 2018. dcary@dcary.com (helpful if you put CFA Review in subject line) Using the TI-BA2+ Notes by David Cary These
More informationMULTIPLE-CHOICE QUESTIONS Circle the correct answer on this test paper and record it on the computer answer sheet.
M I M E 310 E N G I N E E R I N G E C O N O M Y Class Test #2 Thursday, 15 November, 2007 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY
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 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 informationMcGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 12 Planning Investments: Capital Budgeting McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved. What are the Steps in the Capital Budgeting Process? Identify
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 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 informationUnderstanding Financial Management: A Practical Guide Problems and Answers
Understanding Financial Management: A Practical Guide Problems and Answers Chapter 1 Raising Funds and Cost of Capital 1.1 Financial Markets 1. What is the difference between a financial market and a financial
More informationLecture 15. Thursday Mar 25 th. Advanced Topics in Capital Budgeting
Lecture 15. Thursday Mar 25 th Equal Length Projects If 2 Projects are of equal length, but unequal scale then: Positive NPV says do projects Profitability Index allows comparison ignoring scale If cashflows
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 informationThe Time Value. The importance of money flows from it being a link between the present and the future. John Maynard Keynes
The Time Value of Money The importance of money flows from it being a link between the present and the future. John Maynard Keynes Get a Free $,000 Bond with Every Car Bought This Week! There is a car
More informationchapter11 In 1970, the Adolph Coors Company was a The Basics of Capital Budgeting: Evaluating Cash Flows
chapter11 The Basics of Capital Budgeting: Evaluating Cash Flows In 1970, the Adolph Coors Company was a small brewer serving a regional market, but because of its quality products and aggressive marketing,
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 informationCalculator Advanced Features. Capital Budgeting. Contents. Net Present Value (NPV) Net Present Value (NPV) Net Present Value (NPV) Capital Budgeting
Capital Budgeting Contents TI BAII Plus Calculator Advanced Features Uneven Cash Flows Mean, Variance, and Standard Deviation Covariance, Correlation, and Regression Deprecation Net Present Value (NPV)
More informationStrategic Financial Management
CA FINAL Strategic Financial Management Prepared by Manish Ramuka Theory Notes This document contains the all relevant formulas, theory notes, and few relevant examples for better understanding of the
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 informationCAPITAL BUDGETING. John D. Stowe, CFA Athens, Ohio, U.S.A. Jacques R. Gagné, CFA Quebec City, Quebec, Canada
CHAPTER 2 CAPITAL BUDGETING John D. Stowe, CFA Athens, Ohio, U.S.A. Jacques R. Gagné, CFA Quebec City, Quebec, Canada LEARNING OUTCOMES After completing this chapter, you will be able to do the following:
More informationWeb Extension: The ARR Method, the EAA Approach, and the Marginal WACC
19878_12W_p001-010.qxd 3/13/06 3:03 PM Page 1 C H A P T E R 12 Web Extension: The ARR Method, the EAA Approach, and the Marginal WACC This extension describes the accounting rate of return as a method
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 informationJ ohn D. S towe, CFA. CFA Institute Charlottesville, Virginia. J acques R. G agn é, CFA
CHAPTER 2 CAPITAL BUDGETING J ohn D. S towe, CFA CFA Institute Charlottesville, Virginia J acques R. G agn é, CFA La Société de l assurance automobile du Québec Quebec City, Canada LEARNING OUTCOMES After
More informationSession 4, Monday, April 3 rd (4:00-5:00)
Session 4, Monday, April 3 rd (4:00-5:00) Applied Statistical Tools: Risk and Capital Budgeting v2.0 2014 Association for Financial Professionals. All rights reserved. Session 12-1 Chapters Covered Risk
More informationCapital Budgeting (Including Leasing)
Chapter 8 Capital Budgeting (Including Leasing) 8. CAPITAL BUDGETING DECISIONS DEFINED Capital budgeting is the process of making long-term planning decisions for investments. There are typically two types
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 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 informationChapter What are the important administrative considerations in the capital budgeting process?
Chapter 12 Discussion Questions 12-1. What are the important administrative considerations in the capital budgeting process? Important administrative considerations relate to: the search for and discovery
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 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 informationSolutions to Problems
Solutions to Problems 1. The investor would earn income of $2.25 and a capital gain of $52.50 $45 =$7.50. The total gain is $9.75 or 21.7%. $8.25 on a stock that paid $3.75 in income and sold for $67.50.
More information(a) Decision to Make or Buy the Tubes: Variable overhead cost per box: Rs. per Box
Question No. 1 SUGGESTED SOLUTIONS/ ANSWERS SPRING 2018 EXAMINATIONS 1 of 8 (a) Decision to Make or Buy the Tubes: Variable overhead cost per box: Rs. per Box Total manufacturing overhead cost per box
More informationNanyang Business School. Financial Management. Nilanjan Sen, Ph.D., CFA
Nanyang Business School Financial Management Nilanjan Sen, Ph.D., CFA Associate Dean, Nanyang Executive Education Director, English Executive MBA Program Director, Nanyang Fellows Program Nanyang Business
More information2018 CFA Exam Prep. IFT High-Yield Notes. Quantitative Methods (Sample) Level I. Table of Contents
2018 CFA Exam Prep IFT High-Yield Notes Quantitative Methods (Sample) Level I This document should be read in conjunction with the corresponding readings in the 2018 Level I CFA Program curriculum. Some
More informationINSTRUCTIONS: Answer any four (4) questions. Write your answers on the answer sheets provided.
INSTRUCTIONS: Answer any four (4) questions. Write your answers on the answer sheets provided. Question 1 Smith is considering two investments. He can either purchase shares in NGL or bonds from NPP. NGL
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 informationThe Use of Modern Capital Budgeting Techniques. Howard Lawrence
The Use of Modern Capital Budgeting Techniques. Howard Lawrence No decision places a company in more jeopardy than those decisions involving capital improvements. Often these investments can cost billions
More informationIntroduction to Corporate Finance, Fourth Edition. Chapter 5: Time Value of Money
Multiple Choice Questions 11. Section: 5.4 Annuities and Perpetuities B. Chapter 5: Time Value of Money 1 1 n (1 + k) 1 (1.15) PMT $,,(6.5933) $1, 519 k.15 N, I/Y15, PMT,, FV, CPT 1,519 14. Section: 5.7
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 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 informationCA - FINAL INTERNATIONAL FINANCIAL MANAGEMENT. FCA, CFA L3 Candidate
CA - FINAL INTERNATIONAL FINANCIAL MANAGEMENT FCA, CFA L3 Candidate 12.1 International Financial Management Study Session 12 LOS 1 : International Capital Budgeting Capital Budgeting is the process
More informationAdvanced Cost Accounting Acct 647 Prof Albrecht s Notes Capital Budgeting
Advanced Cost Accounting Acct 647 Prof Albrecht s Notes Capital Budgeting Drawing a timeline can help in identifying all the amounts for computations. I ll present two models. The first is without taxes.
More information