CHAPTER 7 INTRODUCTION TO CAPITAL BUDGETING 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 Overview 159 The NPV Rule for Judging Investments and Projects 159 The IRR Rule for Judging Investments 161 NPV or IRR, Which to Use? 162 The “Yes–No” Criterion: When Do IRR and NPV Give the Same Answer? 163 Do NPV and IRR Produce the Same Project Rankings? 164 Capital Budgeting Principle: Ignore Sunk Costs and Consider Only Marginal Cash Flows 168 Capital Budgeting Principle: Don’t Forget the Effects of
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1. Describe the Net Present Value (NPV) method for determining a capital budgeting project's desirability. What is the acceptance benchmark when using NPV? Net present value compares today’s dollar value to the value of that same dollar the future. This amount includes inflation and returns. This method is likely the most correct budgeting method that business owners can use in the decision making regarding new capital projects. If the NPV of a project is positive, then it will be accepted.
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Ch 9 Test – Discounted Cash Flow Analysis • Capital budgeting uses cash flows not accounting profits. • To calculate the value of a capital budgeting project, use incremental cash flows, not total cash flows. • Know what items are considered in cash flow analysis for capital budgeting: ▪ incremental cash flows, ▪ indirect effects, ▪ opportunity costs, ▪ changes in net working capital, ▪ shutdown cash flows,) ▪ beaware of overhead costs. Forget sunk costs. • Know when sunk costs
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Capital Budgeting March 28, 2016 Capital Budgeting An investment project is part of a business growth initiatives, which may be s deemed acceptable or unacceptable based on the rate of the projects return. Unlike most decisions that an organization makes, a capital budgeting decision requires that two decisions a financial and an investment decision. For a business to decide which project to invest their resources, they must use one or several of the tools design for capital budgeting. Definitions
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Capital Budgeting Introduction Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. A firm using capital budgeting, their goal is to see if there fixed income will cover itself for profit. Fixed incomes are things such as land, plant and equipment. When a firm using a machine to produce its good or service. They most of the time what the machine to produce the amount that they paid for the machine
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and Capital Budgeting Part I Capital Budgeting M. Lambert Valuation and Capital Budgeting Part I, HEC-ULg 2013-2014 – Marie Lambert 1 Real investments • Real investments are expenditures that generate cash in the future and, as opposed to financial investments, like stocks and bonds, are not financial instruments that trade in the financial markets • Corporations create value for their shareholders by making good real investment decisions Valuation and Capital Budgeting Part I, HEC-ULg
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Running head: Portfolio Project- Capital Budgeting Page 1 Capital Budgeting April Sutton July 12, 2013 FINANCIAL MANAGEMENT 3004 Instructor Nickey Turner Walden University Running head: Portfolio Project-Capital Budgeting Page 2 INTRODUCTION Capital Budgeting is defined as the process of planning and managing a firm’s long-term investments (Ross, Westerfield & Jordan. 2013). The question of what long term investment should be made is the first step of answering
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Case 32A Toy World, Inc. Cash Budgeting Copyright ( 1996 by the Dryden Press. All rights reserved. CASE INFORMATION PURPOSE This case analyzes a straightforward cash budgeting problem. It is designed to illustrate the mechanics of a cash budget and the way cash budgets are used. Discussion questions focus on the rationale behind the use of cash budgets as well as on their inherent problems. The case also raises the issues of the target cash balance, the optimal size of the
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Case 32A Toy World, Inc. Cash Budgeting Copyright ( 1996 by the Dryden Press. All rights reserved. CASE INFORMATION PURPOSE This case analyzes a straightforward cash budgeting problem. It is designed to illustrate the mechanics of a cash budget and the way cash budgets are used. Discussion questions focus on the rationale behind the use of cash budgets as well as on their inherent problems. The case also raises the issues of the target cash balance, the optimal size of the
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business planning starts with budgets. Budgeting is not an afterthought. Your budget is a reflection of the goals and strategies you have for each area of business. A one-year budget planning document for the firm that is composed of all other budgets is called a master budget. Usually it is composed of two parts, the operating budget and the financial budget. Under the financial budget is what we call a cash budget. Cash Budget is the inflows and outflows of cash in a firm. It develops a summary of
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