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}.
Chapter 5 Capital Budgeting 5-5 2.1 Use Cash Flows, Not Accounting Earnings Example. Accounting Earnings vs. Cash Flows. A machine purchased for $1,000,000 with a life of 10 years generates annual revenues of $300,000 and operating expenses of $100,000. Assume that machine will be depreciated over 10 years using straight-line depreciation.
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