Lecture 3.5 capital budgeting.pdf

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1、NPVandCapitalBudgeting(con’t)BoSunWHATISCAPITALBUDGETING?Whatcapitalbudgetingdoes?Howisthisimportant?•Makeuplong-termassetCapital--Assetsusedinproportionofthebalancesheet,productionofgoodsorwhichultimatelydeterminestheservicesfuturegrowthofthecorporation.B

2、udget--Aplanfor•Theprinciplesofcapitalbudgetinginvestmentofcapitalhavebeenadaptedformanyothercorporatedecisions,suchasleasing,M&A,andbondrefunding.CapitalBudgeting--Theprocessofanalyzing•Manysecurityanalysisandvariousprojectsandportfoliomanagementarebasedd

3、ecidinguponwhichoncapitalbudgetingmethods.onestoincludeinthecapitalbudget.WHATISCAPITALBUDGETING?Typicalsteps?Projectscategories1.Generatingideas•Replacementprojects2.Analyzingindividual•Expansionprojectsproposals3.Planningthecapital•Mewproductsandservices

4、budget•Regulatory,safety,and4.Monitoringandpost-environmentalprojectsauditingPROJECTSINTERACTIONSMutuallyexclusivevs.ProjectsequencingindependentprojectMutuallyExclusiveProjects:InvestinginonecreatestheonlyONEofseveralpotentialoptiontoinvestinanotherprojec

5、tscanbechosen.–RANKallalternativesandselectthebestone.Unlimitedfundsvs.IndependentProjects:acceptingCapitalrationingorrejectingoneprojectdoesnotRaisecapitalforallprofitableaffectthedecisionoftheotherprojectsprojects.–MustexceedaMINIMUMHasafixedamountoffund

6、sacceptancecriteria.IMPORTANTCONCEPTSSunkcostOpportunitycostIncrementalcashflowsexternalityNETPRESENTVALUE(NPV)RULEINCAPITALBUDGETINGBasicsGoodattributesofNPVruleNetPresentValue(NPV)=Total1.UsescashflowsPVoffutureCF’s--Initial2.UsesALLcashflowsoftheInv

7、estmentproject3.DiscountsALLcashflowsEstimatingNPV:properly•Estimatefuturecashflows:howmuch?andwhen?•EstimatediscountrateReinvestmentassumption:•EstimateinitialcoststheNPVruleassumesthatallcashflowscanbeMinimumAcceptanceCriteria:AcceptifNPV>0reinvestedatth

8、ediscountrate.RankingCriteria:ChoosethehighestNPVTHEPAYBACKPERIODRULEExampleBasicsProjectC0C1C2C3HowlongdoesittaketheA-2000+200000projectto“payback”itsB-2000+1000+1000+1000initialinvestment?Disadvantages:Payb