week of QRB/501 we were asked to complete a Capital Budgeting Case based on two possible corporations for our company. Based on the 5 year projected income statement, 5 year projected cash flow, Net Present Value (NPV), and Internal Rate of Return (IRR); we were to determine which company would be the wiser acquisition. After completing the analysis it was determined that Corporation B would be the proper choice of the two corporations. According to our text the NPV, “of an investment proposal is
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certainty can also be divided into following two groups: 2.1 Non-Discounted Cash Flow Criteria: - (a) Pay Back Period (PBP) (b) Return On Investment (ROI) 2.2 Discounted Cash Flow Criteria: - (a) Net Present Value (NPV) (b) Internal Rate of Return (IRR) 3. Non-Discounted Cash Flow Criteria: These are also known as traditional techniques: 3.1 Pay Back Period (PBP) : The pay back period (PBP) is the traditional method of capital budgeting. It is the simplest an perhaps, the most widely used
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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 manager must be able to decide whether an investment is worth undertaking and be able to choose intelligently between two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects is needed. This procedure is called capital budgeting. I. CAPITAL
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Page 158 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
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2/19/2014 Methods of Evaluating Capital Budgeting Projects Capital Budgeting Decision Criteria • • • • • Net Present Value (NPV) Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Profitability Index (PI) Payback Period (PB) Evaluate a Project with the Following Cash Flows Net Present Value • NPV is the present value of all project cash flows Year Cash Flow 0 (100) 1 25 2 75 3 25 – – – – Discount at weighted average
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value. If the present value is positive, the project will be profitable; therefore, it can be approved. If the NPV is negative, the project should be rejected since the costs of investment exceed the returns. 3. Calculate the proposed project’s IRR. Explain the rationale for
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IV. Capital Budgeting A. Suppose the company is considering a potential investment project to add to its portfolio. Calculate the following items: Before Home Depot calculates the net present value (NPV), internal rate of return (IRR), terminal value (TV), and modified internal rate of return (MIRR), the company must calculate its FCFs. The calculation begins by subtracting the operating costs and the 20% depreciation expenses from the cash flows derived from sales revenues. Next, the income
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SEMINAR MANAJEMEN KEUANGAN Primus Automation Division Disusun Oleh : KP A Roy Sutanto 3122103 Andrena Novita Santoso 3122137 FAKULTAS BISNIS DAN EKONOMIKA UNIVERSITAS SURABAYA SEMESTER GENAP 2014 / 2015 Statement of Authorship “Saya/kami yang bertandatangan dibawah ini menyatakan bahwa makalah/tugas terlampir adalah murni hasil pekerjaan saya/kami sendiri. Tidak ada pekerjaan orang lain yang saya/kami gunakan tanpa menyebutkan sumbernya. Materi ini tidak/belum pernah disajikan/digunakan
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Guillermo Furniture Store Concepts * Guillermo Furniture Store (GFS) in the late 1990s faced a financial crisis because of changes in the furniture industry. By going from a leader in the field down to a company that can hardly survive amongst its current competition, different financial concepts for GFS need to be evaluated and incremental financial decisions need to be made in order for GFS to survive (Guillermo Furniture Store Scenario, 2011). This paper will contain a discussion of the weighted
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12% Present Value (4) = (2*3) (100,000) 17,857 23,916 28,471 31,776 17,023 19,043 Sum of Present Value of Cash Inflows = Rs.119,043/- From the Sum of Present Value of Cash Inflows deduct the Initial Investment to get NPV. (b) IRR: In order to find the IRR, we need to find the discount rate at which the NPV at that rate is zero. As the NPV @ 12% is positive, we need to increase the discounting rate, say to 19%. NPV @ 19%: Year 0 1 2 3 4 5 Cash Flows (100,000) 20,000 30,000 40,000 50,000 30
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