公司财务-capital-budgeting.pptVIP

When projects we undertake deliver cash flows in which the discounted value is expected to exceed the cash used to finance the endeavor, Quaker’s economic value increases and shareholders are the immediate beneficiaries. In short, good management decisions result in stock price appreciation.The Quaker Oats Company, 1992 Annual Report. Capital Budgeting Generating investment proposals Estimating future cashflows Evaluating the project cashflows to select projects Reevaluating implemented projects continually Investment Projects Investment in new products New areas of business/ new markets Expansion of existing projects Acquisitions Replacement of equipments/ buildings Changes in the way business is run Research and development Others – Safety related. Pollution control Pay Back Period Number of years in which the original investment in a project is recovered. A cut off period decided to accept / reject a proposal. Expected Cash Flows for Projects Evaluation of Payback Period Timing of cash flows within the payback period ignored. Payments after the payback period is ignored. Arbitrary standard for payback period. Intuitively appealing and easy to calculate. Used for making small value decisions. Useful for growing companies with limited cashflow. Discounted Payback Period Method Time taken for discounted cash inflows to equal initial investment. Takes care of one of the weaknesses. Loses simplicity. Average Accounting Return Average post tax earnings as a percentage of average investment (Book value). Uses Accounting figures and not cash flows. Timing of cash flows ignored. Easy to calculate. Readily available accounting numbers. Net Present Value Method Calculates the present value of the expected cash flows at an appropriate discount rate and subtracts from it the initial investment in the project. If the net present value is positive, the project is accepted. If negative the project is rejected. NPV = {C1/(1+r)1 + C2/(1+r)2 +…+ Cn/(1+