The Basics of Capital BudgetingEvaluating Cash Flows必看课件资料.ppt

Chapter 7: The Basics of Capital Budgeting: Evaluating Cash Flows Overview and “vocabulary” Methods Payback, discounted payback NPV IRR, MIRR Profitability Index Unequal lives Economic life What is capital budgeting? Analysis of potential projects. Long-term decisions; involve large expenditures. Very important to firm’s future. Steps in Capital Budgeting Estimate cash flows (inflows outflows). Assess risk of cash flows. Determine r = WACC for project. Evaluate cash flows. What is the difference between independent and mutually exclusive projects? Projects are: independent, if the cash flows of one are unaffected by the acceptance of the other. mutually exclusive, if the cash flows of one can be adversely impacted by the acceptance of the other. What is the payback period? Payback for Project L(Long: Most CFs in out years) Project S (Short: CFs come quickly) What’s Project L’s NPV? Calculator Solution Rationale for the NPV Method Using NPV method, which project(s) should be accepted? If Projects S and L are mutually exclusive, accept S because NPVs NPVL . If S L are independent, accept both; NPV 0. Internal Rate of Return: IRR What’s Project L’s IRR? Rationale for the IRR Method Decisions on Projects S and L per IRR If S and L are independent, accept both. IRRs r = 10%. If S and L are mutually exclusive, accept S because IRRS IRRL . Construct NPV Profiles To Find the Crossover Rate Two Reasons NPV Profiles Cross Reinvestment Rate Assumptions NPV assumes reinvest at r (opportunity cost of capital). IRR assumes reinvest at IRR. Reinvest at opportunity cost, r, is more realistic, so NPV method is best. NPV should be used to choose between mutually exclusive projects. Managers like rates--prefer IRR to NPV comparisons. Can we give them a better IRR? Why use MIRR versus IRR? Normal Cash Flow Project: Pavilion Project: NPV and IRR? Logic of Multiple IRRs Accept Project P? Note that Project S could be repeated after 2 years to generate additional profits.