Excel Computation for Capital Budgeting
CAPITAL BUDGETING
Overview 159
7.1 The NPV Rule for Judging Investments and Projects 159
7.2 The IRR Rule for Judging Investments 161
7.3 NPV or IRR, Which to Use? 162
7.4 The “Yes–No” Criterion: When Do IRR and NPV Give the Same Answer? 163
7.5 Do NPV and IRR Produce the Same Project
Rankings? 164
7.6 Capital Budgeting Principle: Ignore Sunk Costs and
Consider Only Marginal Cash Flows 168
7.7 Capital Budgeting Principle: Don’t Forget the Effects of Taxes—Sally and Dave’s Condo Investment 169
7.8 Capital Budgeting and Salvage Values 176
7.9 Capital Budgeting Principle: Don’t Forget the Cost of Foregone Opportunities 180
7.10 InHouse Copying or Outsourcing? A Minicase
Illustrating Foregone Opportunity …show more content…
NPV = CF0
↑
Initial cash flowrequired to implement the project.
This is usually a negative number.
+
N t=1 CFt
(1 + r )t
↑
Market value of future cash flows. An Initial Example
To set the stage, let’s assume that you’re trying to decide whether to undertake one of two projects.
Project A involves buying expensive machinery that produces a better product at a lower cost. The machines for project A cost $1,000 and, if purchased, you anticipate that the project will produce cash flows of $500 per year for the next five years. Project B’s machines are cheaper, costing $800, but they produce smaller annual cash flows of $420 per year for the next five years. We’ll assume that the correct discount rate is 12%.
160 PART TWO CAPITAL BUDGETING AND VALUATION
1This assumes that the discount rate is “correctly chosen,” by which we mean that it is appropriate to the riskiness of the project’s cash flows. For the moment, we fudge the question of how to choose discount rates; this topic is discussed in Chapter 9.
0195301501_158192_ch7.qxd 11/3/05 12:47 PM Page 160
CHAPTER 7 Introduction

Capital Budgeting
18943 Words  76 PagesMODULE 9 CAPITAL BUDGETING THEORIES: Basic Concepts Decision Making Process 2. The first step in the decisionmaking process is to A. determine and evaluate possible courses of action. B. identify the problem and assign responsibility. C. make a decision. D. review results of the decision. Strategic planning 39. Strategic planning is the process of deciding on an organization’ A. minor programs and the approximate resources to be devoted to them B. major programs…

Capital Budgeting
763 Words  4 PagesThe Basics of Capital Budgeting Integrated Case Study Allied Components Company You recently went to work for Allied Components Company, a supplier of auto repair parts used in the aftermarket with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the…

Capital Budgeting
1414 Words  6 PagesWeek 4 Discussion Question 1b Introduction Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the…

Capital Budgeting
5568 Words  23 PagesCAPITAL BUDGETING MEANING OF CAPITAL BUDGETING Capital budgeting is the making of long term planning decision for investment fixed assets and their financing. Capital budgeting decision is concerned with current investment that will pay for itself and yield an acceptable rate of return over its life span. Hampton (1992) defines capital budgeting as the decision making process by which firms evaluate the purchase of major fixed assets, including buildings, equipment. It also covers decisions to…

Corporate Budgeting : On Capital Budgeting
1589 Words  7 Pageson capital budgeting. In ordinary world capital budgeting means analyzing the profitability of investment. Further, how distinct principles are associated with the capital budgeting is explained. This chapter also introduced a new principle, “Individual Respond to Incentives”. This principle elaborates how managers reacts towards the deserving incentives. Capital budgeting allow businesses determine best profit generating investment plan and evaluate its profitability. The Capital Budgeting process…

Capital Budgeting
22653 Words  91 Pages2.3. Capital Budgeting This Section includes : Capital Budgeting Process Time Value of Money —Future Value —Present Value Investment Appraisal Techniques —Payback Period —Accounting Rate of Return —Earnings Per Share —Net Present Value —Internal Rate of Return —Net Terminal Value —Profitability Index —Discounted Payback Period Capital Rationing INTRODUCTION : Capital Budgeting is the art of finding assets that are worth more than they cost to achieve a predetermind goal i.e., ‘optimising the wealth…

Capital Budgeting : Budgeting Techniques
817 Words  4 PagesCOMPARING CAPITAL BUDGETING TECHNIQUES In a company, when evaluating multiple opportunities for investment, capital budgeting is an important tool that is used. Every company has a certain amount of capital available that they need to use in the most effective way possible. Capital budgeting involves analysis techniques, planning and justifying how capital dollars are spent on long term assets and projects. It provides methods through which projects are evaluated to decide whether they make sense…

Capital Budgeting
3643 Words  15 PagesReport on Capital Budgeting Abstract This report deals with • The nature of capital investment appraisal • The techniques available for evaluating capital investments • The limitations of these techniques • The capital budgeting practices in select countries Introduction: Some of the major responsibilities of top management are in the area of long range planning. Allocating resources to competing uses is one of the most important decisions a manager has to make. Executives are constantly…

Capital Budgeting
2549 Words  11 PagesCapital Budgeting One of the most important decisions a financial manager can make involves capital budgeting. Capital budgeting is used to determine which fixed assets should be purchased. The purchasing of fixed assets is a form of a longterm investment. Allocating funds in the capital account is a form of capital budgeting. A financial manager will determine if the purchase of a capital asset or fixed asset is worth more over that assets life then it is for the cost to purchase it. In other…

Capital Budgeting : Capital And Budgeting
943 Words  4 PagesCapital budgeting Capital budgeting, which is also called "investment appraisal," is the planning process used to determine which of an organization 's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is to budget for major capital investments or expenditures. Major Methods Many formal methods are used in capital budgeting, including the techniques as followed: • Net present value • Internal rate…
More about Excel Computation for Capital Budgeting

Capital Budgeting
18943 Words  76 Pages 
Capital Budgeting
763 Words  4 Pages 
Capital Budgeting
1414 Words  6 Pages 
Capital Budgeting
5568 Words  23 Pages 
Corporate Budgeting : On Capital Budgeting
1589 Words  7 Pages 
Capital Budgeting
22653 Words  91 Pages 
Capital Budgeting : Budgeting Techniques
817 Words  4 Pages 
Capital Budgeting
3643 Words  15 Pages 
Capital Budgeting
2549 Words  11 Pages 
Capital Budgeting : Capital And Budgeting
943 Words  4 Pages