《财务管理基础 沈洪涛》ch10.pptVIP

CHAPTER 10The Basics of Capital Budgeting What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve large expenditures. Very important to firm’s future. Steps to capital budgeting Estimate CFs (inflows outflows). Assess riskiness of CFs. Determine the appropriate cost of capital. Find NPV and/or IRR. Accept if NPV 0 and/or IRR WACC. What is the difference between independent and mutually exclusive projects? Independent projects – if the cash flows of one are unaffected by the acceptance of the other. Mutually exclusive projects – if the cash flows of one can be adversely impacted by the acceptance of the other. What is the difference between normal and nonnormal cash flow streams? Normal cash flow stream – Cost (negative CF) followed by a series of positive cash inflows. One change of signs. Nonnormal cash flow stream – Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine, etc. What is the payback period? The number of years required to recover a project’s cost, or “How long does it take to get our money back?” Calculated by adding project’s cash inflows to its cost until the cumulative cash flow for the project turns positive. Calculating payback Strengths and weaknesses of payback Strengths Provides an indication of a project’s risk and liquidity. Easy to calculate and understand. Weaknesses Ignores the time value of money. Ignores CFs occurring after the payback period. Discounted payback period Uses discounted cash flows rather than raw CFs. Net Present Value (NPV) Sum of the PVs of all cash inflows and outflows of a project: What is Project L’s NPV? Year CFt PV of CFt 0 -100 -$100 1 10 9.09 2 60 49.59 3 80 60.11 NPVL = $18.79 NPVS = $19.98 Solving for NPV:Financial calculator solution Enter CFs into the calculator’s CFLO register. CF0 = -100 CF1 = 10 CF2 =