ch-7 Capital Budgeting.ppt

CHAPTER 7The Basics of Capital Budgeting I. What is capital budgeting? Long-term investment within the firm Analysis of potential additions to fixed assets. Long-term decisions; involve large expenditures. Very important to firm’s future. (I). Investment classification Internal investment Vs. external investment： -- Internal: Capital Budgeting projects: Replacement: maintenance of business Replacement: cost reduction Expansion of existing products or markets Expansion into new products or markets Environmental or/and Safety projects Others --External: Marketable securities investment (capital market) Invest directly in a company 2．Direct vs. indirect investment 1）Invest in operating assets of a certain company ??invest in marketable securities 2) Above 25%(10%~30%) of share ?? below 25%(10%~30) 3．Long-term ??Short-term investment 4．Initial ??Subsequent investment (II). Steps of investment 1. Investigation 1）Investment environment analysis 2）Market analysis：Potential market and profitability analysis 3）Product analysis 2. Investment estimating (√) 1）What does initial investment consist of and how about their volume? --organization expenses --equipment cost --construction cost --working capital investment --others 2）Cash flows estimation 3）Risk estimation 3． Investment decision Compute investment decision criteria according to previous forecasting. Have investment decision advise. (√) Make final investment decisions by considering firm’s long-term development strategy. It is needed for decision maker not only to know decision making techniques very well but also to have personalities of a enterpriser. 4．Process control 5．Evaluation (√) – Financial analysis (III).