Transcription of Chapter 5 Capital Budgeting
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Chapter 5 Capital Budgeting
Chapter 5 Capital BudgetingRoad MapPart AIntroduction to BValuation of assets, given discount rates. Fixed-Income securities. Common stocks. Real assets ( Capital Budgeting ).Part CDetermination of risk-adjusted discount DIntroduction to Issues NPV Rule Cash Flow Calculations Alternatives to NPV RuleChapter 5 Capital Budgeting5-11 NPV RuleA firm s business involves Capital investments ( Capital Budgeting ), , the acquisition of real assets. The objective is to increasethe firm s current market value. Decision reduces to valuing realassets, , their cash the cash flow of an investment (a project) be{CF0,CF1, ,CFt}.Its current market value isNPV=CF0+CF11+r1+ +CFt(1+rt) is the increase in firm s market value by the Criteria:1.
Chapter 5 Capital Budgeting 5-13 4 Alternatives to NPV In practice, investment rules other than NPV are also used: • Payback Period • Profitability Index (PI) • Internal Rate of Return (IRR) Firms use these rules because they were used historically and they may have worked (in combination with common sense) in the
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