Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Finance
by
Robert Parrino, Ph.D. & David S. Kidwell, Ph.D.
CHAPTER 10
The Fundamentals of
Capital Budgeting
Outline
Introduction to Capital Budgeting
Net Present Value
The Payback Period
Accounting Rate of Return
Internal Rate of Return
Capital Budgeting in Practice
Introduction to Capital
Budgeting
The Importance of Capital Budgeting
Capital-budgeting decisions are the most important
Introduction to Capital
Budgeting
The Importance of Capital Budgeting
Capital investments are important because they
Introduction to Capital
Budgeting
Sources of Information
Most of the information needed to make capital-
the accountants.
All this information is then reviewed by the
Introduction to Capital
Budgeting
Classification of Investment Projects
Capital budgeting projects can be broadly classified
Introduction to Capital
Budgeting
Classification of Investment Projects
1. Independent Projects
Projects are independent when their cash
Introduction to Capital
Budgeting
Classification of Investment Projects
2. Mutually Exclusive Projects
When two projects are mutually exclusive,
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Introduction to Capital
Budgeting
Classification of Investment Projects
3. Contingent Projects
Contingent projects are those where the
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Introduction to Capital
Budgeting
Basic Capital-Budgeting Terms
The cost of capital is the minimum return that a
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Introduction to Capital
Budgeting
Basic Capital-Budgeting Terms
Capital rationing implies that funding needs exceed
funding resources.
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cash flows.
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value of the expected future cash flows and the initial cost of the project.
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technique.
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NCF1 NCF2
NCFn
NPV NCF0
...
2
1 k (1 k)
(1 k) n
n
(10.1)
NCFt
t
(1
k)
t 0
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$80
$80
$80
$80
$(80 30)
NPV -$300
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Answer
PV
80
30
PMT
FV
-283.09
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follows:
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capital projects.
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period.
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$70,000 - $60,000
PB 2 years
$20,000
$10,000
2 years
$20,000
2 years 0.5
2.5 years
Chapter 10 The Fundamentals of Capital Budgeting
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business.
liquidity risk.
The greatest advantage of the payback period is
its simplicity.
It ignores the time value of money.
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budgeting technique:
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(10.3)
Copyright 2008 John Wiley & Sons
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N
Answer
-560
240
PV
PMT
FV
13.7
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(10.5)
MIRR example
(1+MIRR) =
= 1.1309
MIRR = 0.1309,or 13.09%
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making criteria:
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Capital Budgeting in
Practice
Practitioners Methods of Choice
Exhibit 10.12 summarizes surveys of practitioners on
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Capital Budgeting in
Practice
Practitioners Methods of Choice
Now, there is better alignment between practitioners
budgeting tools.
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Capital Budgeting in
Practice
Ongoing and Post-audit Reviews
Management should systematically review the status
of all ongoing capital projects and perform postaudits on all completed capital projects.
In a post-audit review, management compares the
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Capital Budgeting in
Practice
Ongoing and Post-audit Reviews
Managers should also conduct ongoing reviews of
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