Transcription of Chapters 11&12 -- Capital Budgeting
{{id}} {{{paragraph}}}
Example: stock market
Chapters 11&12 -- Capital Budgeting
60 Chapters 11&12 -- Capital Budgeting Capital Budgeting Project classifications Capital Budgeting techniques Cash flow estimation Risk analysis in Capital Budgeting Optimal Capital budget Capital Budgeting Strategic business plan: a long-run plan that outlines in broad terms the firm s basic strategy for the next 5 to 10 years Capital Budgeting : the process of planning expenditures on assets with cash flows that are expected to extend beyond one year Project classifications Replacements: Need to continue current operations Need to reduce costs Expansions: Need to expand existing products or markets Need to expend into new products or markets Others: safety/environmental projects, mergers Capital Budgeting techniques (Chapter 11) (1) Net present value (NPV): present value of future net cash flows, discounted at the cost of Capital NtttrCFNPV0)1(, where r is the cost of Capital , CFt is the cash flow in time t (2) Internal rate of return (IRR): rate of return a project earns (a discount rate that forces a project s NPV to equal zero) NtttIRRCFNPV00)1( Problems associated with IRR: Multiple rates of return and unrealistic reinvestment rate assumption 61 (3) Modified internal rate of return (MIRR): discount rate at which the present value of initial cost is equal to the present value of the terminal value (4) payback perio
(3) Modified internal rate of return (MIRR): discount rate at which the present value of initial cost is equal to the present value of the terminal value (4) Payback period: the length of time (years) required for an investment’s cash flows to cover its cost (5) Discounted payback period: the length of time (years) required for an
Tags:
Information
Domain:
Source:
Link to this page:
Please notify us if you found a problem with this document: