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Bài giảng Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows

Bài giảng Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows provides about Overview and “vocabulary”, Methods (Payback, discounted payback; NPV; IRR, MIRR; Profitability Index), Unequal lives, Economic life. | Chapter 10: 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? The number of years required to recover a project’s cost, or how long does it take to get the business’s money back? Payback for Franchise L (Long: Most CFs in out years) 10 80 60 0 1 2 3 -100 = CFt Cumulative -100 -90 -30 50 PaybackL 2 + 30/80 = 2.375 years 0 100 2.4 Franchise S (Short: CFs come quickly) 70 20 50 0 1 2 3 -100 CFt Cumulative -100 -30 20 40 PaybackS 1 + 30/50 = 1.6 years 100 0 1.6 = Strengths of Payback: 1. Provides an indication of a project’s risk and liquidity. 2. Easy to calculate and understand. Weaknesses of Payback: 1. Ignores the TVM. 2. Ignores CFs occurring after the payback period. 10 80 60 0 1 2 3 CFt Cumulative -100 -90.91 -41.32 18.79 Discounted payback 2 + 41.32/60.11 = 2.7 yrs Discounted Payback: Uses discounted rather than raw CFs. PVCFt -100 -100 10% 9.09 49.59 60.11 = Recover invest. + cap. costs in 2.7 yrs. NPV: Sum of the PVs of inflows and outflows. Cost often is CF0 and is negative. What’s Franchise L’s NPV? 10 80 60 0 1 2 3 10% Project L: -100.00 9.09 49.59 60.11 18.79 = NPVL NPVS = $19.98. Calculator Solution Enter in CFLO for L: -100 10 60 80 10 CF0 CF1 NPV CF2 CF3 I = 18.78 = NPVL Rationale for the NPV Method NPV = PV inflows - Cost = Net gain . | Chapter 10: 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? The number of years required to recover a project’s cost, or how long does it take to get the business’s money back? Payback for Franchise L (Long: Most CFs in out years) 10 80 60 0 1 2 3 -100 = CFt .