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1、Chapter13CapitalBudgetingTechniquesCapitalBudgetingTechniquesProjectEvaluationandSelectionPotentialDifficultiesCapitalRationingProjectMonitoringPost-CompletionAuditProjectEvaluation:AlternativeMethodsPaybackPeriod(PBP)InternalRateofReturn(IRR)NetPresentValue(NPV)Pro
2、fitabilityIndex(PI)ProposedProjectDataJulieMillerisevaluatinganewprojectforherfirm,BasketWonders(BW).Shehasdeterminedthattheafter-taxcashflowsfortheprojectwillbe$10,000;$12,000;$15,000;$10,000;and$7,000,respectively,foreachoftheYears1through5.Theinitialcashoutlaywil
3、lbe$40,000.IndependentProjectIndependent--Aprojectwhoseacceptance(orrejection)doesnotpreventtheacceptanceofotherprojectsunderconsideration.Forthisproject,assumethatitisindependentofanyotherpotentialprojectsthatBasketWondersmayundertake.PaybackPeriod(PBP)PBPistheperi
4、odoftimerequiredforthecumulativeexpectedcashflowsfromaninvestmentprojecttoequaltheinitialcashoutflow.012345-40K10K12K15K10K7K(c)10K22K37K47K54KPaybackSolution(#1)PBP=a+(b-c)/d=3+(40-37)/10=3+(3)/10=3.3Years012345-40K10K12K15K10K7KCumulativeInflows(a)(-b)(d)PaybackSo
5、lution(#2)PBP=3+(3K)/10K=3.3YearsNote:Takeabsolutevalueoflastnegativecumulativecashflowvalue.CumulativeCashFlows-40K10K12K15K10K7K012345-40K-30K-18K-3K7K14KPBPAcceptanceCriterionYes!Thefirmwillreceivebacktheinitialcashoutlayinlessthan3.5years.[3.3Years<3.5YearMax.]T
6、hemanagementofBasketWondershassetamaximumPBPof3.5yearsforprojectsofthistype.Shouldthisprojectbeaccepted?PBPStrengths andWeaknessesStrengths:EasytouseandunderstandCanbeusedasameasureofliquidityEasiertoforecastSTthanLTflowsWeaknesses:DoesnotaccountforTVMDoesnotconside
7、rcashflowsbeyondthePBPCutoffperiodissubjectiveInternalRateofReturn(IRR)IRRisthediscountratethatequatesthepresentvalueofthefuturenetcashflowsfromaninvestmentprojectwiththeproject’sinitialcashoutflow.CF1CF2CFn(1+IRR)1(1+IRR)2(1+IRR)n+...++ICO=$15,000$10,000$7,000IRRSo
8、lution$10,000$12,000(1+IRR)1(1+IRR)2Findtheinterestrate(IRR)thatcausesthediscountedcashflowstoequal$40,000.++++$40,000=(1+IRR)3(1+IRR)4(1+
