CHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation
|
|
- Duane Lewis
- 7 years ago
- Views:
Transcription
1 CHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation Should we build this plant? 10-1
2 Capital Budgeting Overview Project Classifications Analysis Methods/Decision Rules Comparison of NPV & IRR Optimal Capital Budget 10-2
3 What is Capital Budgeting? Long-term Strategic Decisions Analysis of Future Cash Flows Large Expenditures (Fixed Assets) Basis for Future Growth 10-3
4 5 Steps to Capital Budgeting 1. Estimate CFs (inflows & outflows) 2. Assess riskiness of CFs 3. Determine the Risk-adjusted Cost of Capital 4. Find NPV and/or IRR (and other methods) 5. Accept if NPV > 0 and/or IRR > WACC 10-4
5 Project Classifications Replacement Maintenance Cost Reduction Expansion Existing Products or Markets New Products or Markets Safety or Environmental R&D (Long-term) Long-term Contracts (Specific Customers) 10-5
6 Major Capital Budgeting Methods Payback ( + Discounted Payback) Discounted Cash Flow (DCF or NPV) Internal Rate of Return (IRR) Profitability Index (not used in practice) Modified Internal Rate of Return (MIRR) 10-6
7 Independent vs Mutually Exclusive Projects? Independent projects if the cash flows of one are unaffected by the acceptance of the other. Mutually exclusive projects if the cash flows of one can be adversely impacted by the acceptance of the other. 10-7
8 Normal vs Nonnormal cash flow streams? Normal stream Negative CF followed by a series of positive CFs. 1 change of sign Nonnormal stream Two or more changes of sign Most common: Negative CF followed by positive CFs, then negative CF to terminate Nuclear Power, Toxic Waste 10-8
9 Payback Method The number of years required to recover a project s cost, or How long does it take to get our money back? Calculated determining when the cumulative cash flow for the project turns positive. 10-9
10 Calculating Payback Project L CF t Cumulative Payback L = / 80 = years Project S CF t Cumulative Payback S = / 50 = 1.6 years 10-10
11 Strengths & Weaknesses of Payback Strengths Provides an indication of a project s risk and liquidity. Easy to calculate and understand. Weaknesses Ignores the time value of money Discounted Payback Alternative Ignores CFs occurring after the payback 10-11
12 Net Present Value (NPV) Method Sum of the PVs of ALL cash inflows and outflows of a project: NPV = CF t /(1 + r) t + CF 0 OR NPV t n 0 CFt (1 r ) t 10-12
13 Project L s NPV, r=10% Year CF t PV of CF t $ NPV L = $18.79 NPV S = $
14 Rationale for NPV NPV= PV of inflows PV outflows (Cost) = Net gain in Wealth If projects are independent, accept if the project NPV > 0 If projects are mutually exclusive, accept projects with the highest positive NPV, Accept S if mutually exclusive (NPV s > NPV L ) & both if independent 10-14
15 Internal Rate of Return (IRR) Method IRR is the discount rate that forces PV of inflows equal to costs. NPV = 0: 0 t n 0 ( 1 CFt IRR ) t IRR L = 18.13% and IRR S = 23.56%
16 Project IRR vs Bond YTM Same Concept YTM on the bond would be the IRR of the bond project EXAMPLE: Assume a 10-year bond with a 9% annual coupon sells for $1, Solve for IRR = YTM = 7.08% 10-16
17 Rationale for IRR If IRR > WACC, the Project s return is greater than its costs. There is excess Return left over to boost stockholders returns
18 IRR Acceptance Criteria If IRR > r, accept project. If IRR < r, reject project. If projects are independent, accept both projects, as IRR > r = 10% If projects are mutually exclusive, accept S, because IRR s > IRR L
19 NPV Profiles A graphical representation of project NPVs at various different costs of capital. r NPV L NPV S 0 $50 $ (4)
20 Drawing NPV profiles NPV ($) Crossover Point = 8.7% L. S IRR L = 18.1% IRR S = 23.6% Discount Rate (%) 10-20
21 Main Reasons why NPV & IRR Decisions may Conflict Reinvestment Rate Assumptions are different Size (scale) differences the smaller project frees up funds at t = 0 for investment. The higher the opportunity cost, the more valuable these funds, so high r favors small projects Timing differences the project with faster payback provides more CF in early years for reinvestment. If r is high, early CF good, NPV S > NPV L
22 Reinvestment Rate Assumptions NPV method assumes CFs are reinvested at r, the opportunity cost of capital. IRR method assumes CFs are reinvested at IRR. Assuming CFs are reinvested at the opportunity cost of capital is more realistic, so NPV method is the best. NPV method should be used to choose between mutually exclusive projects
23 Profitability Index (PI) PI is the Ratio of the PV of the Cash Inflows to the PV of Investment PI = [ [CFinflow t /(1+r) t ]] CFinvest 0 PI L = $158.1/$100 = PI s = $159.7/$100 =
24 Optimal Capital Budget Theory says to accept all positive NPV projects. Two problems can occur when there is not enough internally generated cash to fund all positive NPV projects: An increasing Marginal Cost of Capital. Capital Rationing 10-24
25 Increasing Marginal Cost of Capital Externally raised capital can have large flotation costs, which increase the cost of capital. Investors often perceive large capital budgets as being risky, which drives up the cost of capital
26 Capital Rationing Capital rationing occurs when a company chooses not to fund all positive NPV projects. The company typically sets an upper limit on the total amount of capital expenditures that it will make in the upcoming year
27 Cash Flow Estimation Estimating Relevant Cash Flows Adjusting for Inflation 10-27
28 Relevant Project Cash Flows 2 Cardinal Rules Use Cash Flows NOT Accounting Income Use Incremental After-tax Cash Flows Cash Flows Included Opportunity Costs Externalities Cash Flows NOT Included Finance Costs Sunk Costs 10-28
29 Example Project Initial Investment Depreciable Investment ($240,000) Changes in Working Capital ($20,000) Operations (no inflation) New sales: 100,000 $2/unit Variable cost: 60% of sales Life of the project Economic life: 4 years Depreciable life: MACRS 3-year class Salvage value: $25,000 Tax rate: 40% WACC: 10% 10-29
30 Determining Project Value Estimate relevant Cash Flows Initial OCF 1 OCF 2 OCF 3 OCF 4 Invest + Terminal CFs NCF 0 NCF 1 NCF 2 NCF 3 NCF
31 Investment Cash Flows Initial Investments (Depreciable Cost) Equipment $200,000 Ship/Installation 40,000 Net Investment CF 0 $240,000 Change in Working Capital Inventories $25,000 (Asset) Acct/Payables $5,000 (Liability) Net Δ NOWC $20,
32 Annual Depreciation Expense Year Rate x Basis Depr x $240 $ x x x $240 Due to the MACRS ½-year convention, a 3-year asset is depreciated over 4 years
33 Annual Operating Cash Flows Revenues Op. Costs (60%) Depr Expense Oper. Income (EBIT) Tax (40%) Oper. Income (AT) Depr Expense Operating CF
34 Terminal Cash Flow Recovery of NOWC $20,000 Salvage value 25,000 Tax on SV (40%) -10,000 Terminal CF $35,
35 Estimated Project CFs (No Inflation) Terminal CF CCF IRR & NPV at WACC = 10%. NPV = -$4.01 million IRR = 9.28% Payback = 3.30 yrs 10-35
36 What if the expected Annual Inflation is 5%. Is NPV biased? Yes, inflation included in the discount rate (WACC) Inflation NOT included in CFs CFs should be adjusted for Inflation 10-36
37 Operating CFs, Inflation = 5% Revenues Op. Costs (60%) Depr Expense Oper. Income (BT) Tax (40%) Oper. Income (AT) Depr Expense Operating CF
38 Estimated Project CFs adjusted for Inflation Terminal CF IRR & NPV at WACC = 10%. NPV = $14.78 million. IRR = 12.56%. Payback = 3.12 yrs 10-38
Chapter 10. What is capital budgeting? Topics. The Basics of Capital Budgeting: Evaluating Cash Flows
Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows 1 Topics Overview and vocabulary Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life 2 What
More informationCapital Budgeting: Decision. Example. Net Present Value (NPV) FINC 3630 Yost
Capital Budgeting: Decision Criteria Example 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
More informationWhy Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of
1 Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability
More informationCapital Budgeting Tools. Chapter 11. Capital Budgeting. Types of Capital Budgeting Projects. The Basics of Capital Budgeting: Evaluating Cash Flows
Capital Budgeting Tools () Payback Period (a) Discounted Payback Period Chapter The Basics of Capital Budgeting: Evaluating s () Net Present Value (NPV) (a) Profitability Index (PI) () Internal Rate of
More informationChapter 13 The Basics of Capital Budgeting Evaluating Cash Flows
Chapter 13 The Basics of Capital Budgeting Evaluating Cash Flows ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 13-1 a. The capital budget outlines the planned expenditures on fixed assets. Capital budgeting
More informationNet Present Value (NPV)
Investment Criteria 208 Net Present Value (NPV) 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 and
More informationWeek- 1: Solutions to HW Problems
Week- 1: Solutions to HW Problems 10-1 a. Payback A (cash flows in thousands): Annual Period Cash Flows Cumulative 0 ($5,000) ($5,000) 1 5,000 (0,000) 10,000 (10,000) 3 15,000 5,000 4 0,000 5,000 Payback
More informationCHAPTER 14 COST OF CAPITAL
CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,
More informationCHAPTER 11. Proposed Project. Incremental Cash Flow for a Project. Treatment of Financing Costs. Estimating cash flows:
CHAPTER 11 Cash Flow Estimation and Risk Analysis Estimating cash flows: Relevant cash flows Working capital treatment Inflation Risk Analysis: Sensitivity Analysis, Scenario Analysis, and Simulation Analysis
More informationKey Concepts and Skills. Net Present Value and Other Investment Rules. http://www2.gsu.edu/~fnccwh/pdf/ rwjch5v3overview.pdf.
McGraw-Hill/Irwin Net Present Value and Other Investment Rules 9-1 http://www2.gsu.edu/~fnccwh/pdf/ rwjch5v3overview.pdf Copyright 2010 by Charles Hodges and the McGraw-Hill Companies, Inc. All rights
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Basic 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the
More informationChapter 8: Using DCF Analysis to Make Investment Decisions
FIN 301 Class Notes Chapter 8: Using DCF Analysis to Make Investment Decisions Capital Budgeting: is the process of planning for capital expenditures (long term investment). Planning process involves 1-
More informationChapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows ANSWERS TO END-OF-CHAPTER QUESTIONS 10-1 a. Capital budgeting is the whole process of analyzing projects and deciding whether they should
More informationUnderstanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 8 Capital Budgeting Concept Check 8.1 1. What is the difference between independent and mutually
More informationCHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING
CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.
More informationSpring 2012. True/False Indicate whether the statement is true or false.
Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid
More informationFinancial and Cash Flow Analysis Methods. www.project-finance.com
Financial and Cash Flow Analysis Methods Financial analysis Historic analysis (BS, ratios, CF analysis, management strategy) Current position (environment, industry, products, management) Future (competitiveness,
More informationChapter 5 Capital Budgeting
Chapter 5 Capital Budgeting Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-Income securities. Common stocks. Real assets (capital budgeting). Part C Determination
More information(Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics)
Capital Budgeting: Net Present Value vs Internal Rate of Return (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Y O Lam Capital budgeting assists decision makers in a
More informationSession #5 Capital Budgeting - II Damodaran - Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14
Session #5 Capital Budgeting - II Damodaran - Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14 I. Additional Issues in Capital Budgeting. A. Capital rationing: Use profitability index
More informationChapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 11-1 a. Cash flow, which is the relevant financial variable, represents the actual flow of cash. Accounting
More informationChapter 9 Capital Budgeting Decision Models
Chapter 9 Capital Budgeting Decision Models LEARNING OBJECTIVES (Slide 9-2) 1. Explain capital budgeting and differentiate between short-term and long-term budgeting decisions. 2. Explain the payback model
More informationAnswers to Warm-Up Exercises
Answers to Warm-Up Exercises E10-1. Answer: E10-2. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable
More informationCHAPTER 8 CAPITAL BUDGETING DECISIONS
CHAPTER 8 CAPITAL BUDGETING DECISIONS Q1. What is capital budgeting? Why is it significant for a firm? A1 A capital budgeting decision may be defined as the firm s decision to invest its current funds
More informationChapter 13 Capital Budgeting: Estimating Cash Flow and Analyzing Risk ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 13 Capital Budgeting: Estimating Cash Flow and Analyzing Risk ANSWERS TO END-OF-CHAPTER QUESTIONS 13-3 Since the cost of capital includes a premium for expected inflation, failure to adjust cash
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 informationSTUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED.
Test III-FINN3120-090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA
More informationChapter 9. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 $20.60 $12.36 $1.00 $2.06 $5.18 $3.11
Chapter 9 9-1 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income After-tax Operating Income 1 $20.60
More informationCapital Budgeting OVERVIEW
WSG12 7/7/03 4:25 PM Page 191 12 Capital Budgeting OVERVIEW This chapter concentrates on the long-term, strategic considerations and focuses primarily on the firm s investment opportunities. The discussions
More informationChapter 7: Net Present Value and Capital Budgeting
Chapter 7: Net Present Value and Capital Budgeting 7.1 a. Yes, the reduction in the sales of the company s other products, referred to as erosion, should be treated as an incremental cash flow. These lost
More informationChapter 9 Making Capital Investment Decisions Introduction
Chapter 9 Making Capital Investment Decisions Introduction The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted These cash flows
More information$1,300 + 1,500 + 1,900 = $4,700. in cash flows. The project still needs to create another: $5,500 4,700 = $800
1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1,300 + 1,500 + 1,900 = $4,700 in cash flows.
More informationChapter 9 Net Present Value and Other Investment Criteria Chapter Organization
T9.1 Chapter Outline Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization! 9.1 Net Present Value! 9.2 The Payback Rule! 9.3 The Average Accounting Return! 9.4 The Internal Rate
More informationChapter 11 Cash Flow Estimation and Risk Analysis
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO END-OF-CHAPTER QUESTIONS 11-1 a. Cash flow, which is the relevant financial variable, represents the actual flow of cash. Accounting income,
More informationCHAPTER 7: NPV AND CAPITAL BUDGETING
CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental
More informationFinance 3130 Corporate Finiance Sample Final Exam Spring 2012
Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project
More informationWhich projects should the corporation undertake
Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.
More informationCARNEGIE MELLON UNIVERSITY CIO INSTITUTE
CARNEGIE MELLON UNIVERSITY CIO INSTITUTE CAPITAL BUDGETING BASICS Contact Information: Lynne Pastor Email: lp23@andrew.cmu.edu RELATED LEARNGING OBJECTIVES 7.2 LO 3: Compare and contrast the implications
More informationMODULE 2. Capital Budgeting
MODULE 2 Capital Budgeting Capital Budgeting is a project selection exercise performed by the business enterprise. Capital budgeting uses the concept of present value to select the projects. Capital budgeting
More informationMeasuring Investment Returns
Measuring Investment Returns Aswath Damodaran Stern School of Business Aswath Damodaran 156 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The
More informationMultiple Choice Questions (45%)
Multiple Choice Questions (45%) Choose the Correct Answer 1. The following information was taken from XYZ Company s accounting records for the year ended December 31, 2014: Increase in raw materials inventory
More informationHow To Calculate Discounted Cash Flow
Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase
More informationMBA (3rd Sem) 2013-14 MBA/29/FM-302/T/ODD/13-14
Full Marks : 70 MBA/29/FM-302/T/ODD/13-14 2013-14 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM-302 Time : 3 Hours The figures in the right-hand margin indicate marks. Candidates are required
More informationCHAPTER 8: ESTIMATING CASH FLOWS
CHAPTER 8: ESTIMATING CASH FLOWS 8-1 a. Straight line depreciation = ($15 - $3)/10 = $1.20 Annual Tax Savings from Depreciation = $ 1.2 (0.4) = $0.48 Present Value of Tax Savings from Depreciation = $
More informationCHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows, a payback period less than the project s life means
More informationInvestment Decision Analysis
Lecture: IV 1 Investment Decision Analysis The investment decision process: Generate cash flow forecasts for the projects, Determine the appropriate opportunity cost of capital, Use the cash flows and
More informationChapter 9 Cash Flow and Capital Budgeting
Chapter 9 Cash Flow and Capital Budgeting MULTIPLE CHOICE 1. Gamma Electronics is considering the purchase of testing equipment that will cost $500,000. The equipment has a 5-year lifetime with no salvage
More informationChapter 09 - Using Discounted Cash-Flow Analysis to Make Investment Decisions
Solutions to Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 1. Net income = ($74 $42 $10) [0.35 ($74 $42 $10)] = $22 $7.7 = $14.3 million Revenues cash expenses taxes paid =
More informationCapital Investment Appraisal Techniques
Capital Investment Appraisal Techniques To download this article in printable format click here A practising Bookkeeper asked me recently how and by what methods one would appraise a proposed investment
More informationNPV Versus IRR. W.L. Silber -1000 0 0 +300 +600 +900. We know that if the cost of capital is 18 percent we reject the project because the NPV
NPV Versus IRR W.L. Silber I. Our favorite project A has the following cash flows: -1 + +6 +9 1 2 We know that if the cost of capital is 18 percent we reject the project because the net present value is
More information6 Investment Decisions
6 Investment Decisions After studying this chapter you will be able to: Learning Objectives Define capital budgeting and explain the purpose and process of Capital Budgeting for any business. Explain the
More informationBUSINESS FINANCE (FIN 312) Spring 2009
BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to
More informationBF 6701 : Financial Management Comprehensive Examination Guideline
BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and
More informationCapital Budgeting continued: Overview:(1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows
Capital Budgeting continued: Overview:(1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows Chapter 7: 1,5,7,8,27,32 Chapter 8: 1,3,5,8,13 (clarification for problem 13b:
More informationFinance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.
Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has $500 of cash revenue and $300
More informationCHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
More informationChapter 8 Capital Budgeting Process and Techniques
Chapter 8 Capital Budgeting Process and Techniques MULTIPLE CHOICE 1. The capital budgeting process involves a. identifying potential investments b. analyzing the set of investment opportunities, and identifying
More informationChapter 20 Lease Financing ANSWERS TO END-OF-CHAPTER QUESTIONS
Chapter 20 Lease Financing ANSWERS TO END-OF-CHAPTER QUESTIONS 20-1 a. The lessee is the party leasing the property. The party receiving the payments from the lease (that is, the owner of the property)
More informationCourse 3: Capital Budgeting Analysis
Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended
More informationWORKBOOK ON PROJECT FINANCE. Prepared by Professor William J. Kretlow University of Houston
WORKBOOK ON PROJECT FINANCE Prepared by Professor William J. Kretlow University of Houston 2002 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. TABLE
More informationInvestment Appraisal
Investment Appraisal Article relevant to F1 Business Mathematics and Quantitative Methods Author: Pat McGillion, current Examiner. Questions 1 and 6 often relate to Investment Appraisal, which is underpinned
More informationChapter 10: Making Capital Investment Decisions
Chapter 10: Making Capital Investment Decisions Faculty of Business Administration Lakehead University Spring 2003 May 21, 2003 Outline 10.1 Project Cash Flows: A First Look 10.2 Incremental Cash Flows
More informationFirms generate cash flows by using assets without assets, there would be
Chapter 11 Capital Budgeting: The Basics Required Investment Sales Revenues Operating Costs Taxes VALUE = Component Costs Firm Risk Project Risk Country Risk N t=0 Project Free Cash Flows (FCF t ) CF t
More informationChapter 011 Project Analysis and Evaluation
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. C. possibility
More informationHow To Get A Profit From A Machine
Vol. 2, Chapter 4 Capital Budgeting Problem 1: Solution Answers found using Excel formulas: 1. Amount invested = $10,000 $21,589.25 Compounding period = annually Number of years = 10 Annual interest rate
More informationThe table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% = 5.216. = 3.93 years
21-18 Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% 5.216 1a. Net present value $28,000 (5.216) $146,048 $36,048
More informationCapital Budgeting Techniques: Certainty and Risk
Capital Budgeting Techniques: Certainty and Risk 340 LG1 LG2 LG3 LG4 LG5 LG6 Chapter 9 LEARNING GOALS Calculate, interpret, and evaluate the payback period. Apply net present value (NPV) and internal rate
More informationCapital Budgeting. Financial Modeling Templates
Financial Modeling Templates http://spreadsheetml.com/finance/capitalbudgeting.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse affect
More informationTVM Appendix B: Using the TI-83/84. Time Value of Money Problems on a Texas Instruments TI-83 1
Before you start: Time Value of Money Problems on a Texas Instruments TI-83 1 To calculate problems on a TI-83, you have to go into the applications menu, the blue APPS key on the calculator. Several applications
More informationPlanning for Capital Investments
12-1 Planning for Capital Investments Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 12-2 study objectives 1. Discuss capital budgeting evaluation, and explain inputs used in capital budgeting.
More informationCapital Budgeting Cash Flows
Learning Objectives 1-1 Capital Budgeting Cash Flows 1 Corporate Financial Management 3e Emery Finnerty Stowe 1-2 Calculate incremental after-tax cash flows for a capital budgeting project. Explain the
More information2. CAPITAL BUDGETING TECHNIQUES
2. CAPITAL BUDGETING TECHNIQUES 2.1 Introduction 2.2 Capital budgeting techniques under certainty 2.2.1 Non-discounted Cash flow Criteria 2.2.2 Discounted Cash flow Criteria 2.3 Comparison of NPV and IRR
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project s life means that the NPV is positive for
More informationCapital Budgeting Further Considerations
Capital Budgeting Further Considerations For 9.220, Term 1, 2002/03 02_Lecture10.ppt Lecture Outline Introduction The input for evaluating projects relevant cash flows Inflation: real vs. nominal analysis
More informationProject Cost Management
Project Cost Management Guide to Mathematical Questions PMI, PMP, CAPM, PMBOK, PM Network and the PMI Registered Education Provider logo are registered marks of the Project Management Institute, Inc. Present
More informationChapter 18. Web Extension: Percentage Cost Analysis, Leasing Feedback, and Leveraged Leases
Chapter 18 Web Extension: Percentage Cost Analysis, Leasing Feedback, and Leveraged Leases Percentage Cost Analysis Anderson s lease-versus-purchase decision from Chapter 18 could also be analyzed using
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2009 Answers 1 (a) Weighted average cost of capital (WACC) calculation Cost of equity of KFP Co = 4 0 + (1 2 x (10 5 4 0)) =
More information1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600
More informationChapter 8: Fundamentals of Capital Budgeting
Chapter 8: Fundamentals of Capital Budgeting-1 Chapter 8: Fundamentals of Capital Budgeting Big Picture: To value a project, we must first estimate its cash flows. Note: most managers estimate a project
More informationTypes of Leases. Lease Financing
Lease Financing Types of leases Tax treatment of leases Effects on financial statements Lessee s analysis Lessor s analysis Other issues in lease analysis Who are the two parties to a lease transaction?
More information1.1 Introduction. Chapter 1: Feasibility Studies: An Overview
Chapter 1: Introduction 1.1 Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. Consider launching a new product. This involves
More informationAnswers to Warm-Up Exercises
Answers to Warm-Up Exercises E11-1. Categorizing a firm s expenditures Answer: In this case, the tuition reimbursement should be categorized as a capital expenditure since the outlay of funds is expected
More informationFIN 614 Cash Flow Forecasting. Professor Robert B.H. Hauswald Kogod School of Business, AU. Vitamin C. Cash flows matter: focus on economics
FIN 64 Cash Flow Forecasting Professor Robert B.H. Hauswald Kogod School of Business, AU Vitamin C Cash flows matter: focus on economics not earnings or other accounting measures Continue our focus on
More informationIntroduction to Discounted Cash Flow and Project Appraisal. Charles Ward
Introduction to Discounted Cash Flow and Project Appraisal Charles Ward Company investment decisions How firms makes investment decisions about real projects (not necessarily property) How to decide which
More informationThe Marginal Cost of Capital and the Optimal Capital Budget
WEB EXTENSION12B The Marginal Cost of Capital and the Optimal Capital Budget If the capital budget is so large that a company must issue new equity, then the cost of capital for the company increases.
More informationMGT201 Solved MCQs(500) By
MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because
More information] (3.3) ] (1 + r)t (3.4)
Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of t-year annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity
More informationUNIVERSITY OF WAH Department of Management Sciences
BBA-330: FINANCIAL MANAGEMENT UNIVERSITY OF WAH COURSE DESCRIPTION/OBJECTIVES The module aims at building competence in corporate finance further by extending the coverage in Business Finance module to
More information1. What are the three types of business organizations? Define them
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
More informationSOLUTIONS. Practice questions. Multiple Choice
Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta
More informationCash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 5,670 6,808 5,788 6,928 Variable
More informationOklahoma State University Spears School of Business. Capital Investments
Oklahoma State University Spears School of Business Capital Investments Slide 2 Incremental Cash Flows Cash flows matter not accounting earnings. Sunk costs do not matter. Incremental cash flows matter.
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset
More informationReview Solutions FV = 4000*(1+.08/4) 5 = $4416.32
Review Solutions 1. Planning to use the money to finish your last year in school, you deposit $4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen
More information18 CAPITAL INVESTMENT
18 CAPITAL INVESTMENT (Contributed by Deryl Northcott) Introduction Capital Investment Defined Who is Involved in Making CI Decisions? Why Are Capital Investment Decisions Important? Types of Capital Investments
More informationCash Flow Analysis Venture Business Perspective
Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses based
More informationDiscounted Cash Flow. Alessandro Macrì. Legal Counsel, GMAC Financial Services
Discounted Cash Flow Alessandro Macrì Legal Counsel, GMAC Financial Services History The idea that the value of an asset is the present value of the cash flows that you expect to generate by holding it
More informationMBA Financial Management and Markets Exam 1 Spring 2009
MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial
More information