Chapter 6 How to Analyze Investment projects.ppt

Chapter 6 How to Analyze Investment projects objectives -- To show how to use discounted cash flow analysis to make decisions such as Whether to enter a new line of business Analyze how to decide whether to invest in equipment to reduce operating costs ☆ Contents 1 The Nature of Project Analysis 2 Where do Investments Ideas come from? 3 The NPV Investment Rule 4 Estimating a Project.s Cash Flows 5 Cost of Capital 6 Sensitivity Analysis 7 Analyzing Cost-Reducing Projects 8 Projects with Different Lives 9 Ranking Mutually Exclusive Projects 10 Inflation Capital Budgeting 6.1 The Nature of Project Analysis We apply the techniques of Discounted Cash Flow to the analysis of investment decisions by business firms. The process of analyzing the investment decision(or choosing the company’s long-term capital investment) is called Capital Budgeting. The process of Capital Budgeting can be broken down into five steps as a project moves from idea to reality: -- Generating ideas for capital budgeting projects. -- Preparing proposals -- Reviewing existing projects and facilities. -- Evaluating proposed projects and creating the capital budget, the company’s set of planned capital expenditures. -- Deciding and preparing appropriation requests. 6.2 where do Investment Ideas Come From? Classifying Capital Budgeting Projects -- Maintenance projects -- Cost-saving / Revenue-enhancement projects -- Capacity expansion in current businesses -- New products and new businesses -- Projects required by government regulation or company policy Division management ideas ideas ideas RD ideas Plant management Strategic planning ideas Production management and other employees 6.3 The Net pr