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Financial Analysis With Microsoft Excel-Mayes, Shank - Chapter 10

CHAPTER 10 Capital Budgeting Identify the relevant cash flows in capital budgeting. Demonstrate the use of Excel in calculating the after-tax cash flows used as inputs to the various decision making techniques. Compare and contrast the six major capital budgeting decision techniques. | 1 0 Capital Budgeting After studying this chapter you should be able to 1. Identify the relevant cash flows in capital budgeting. 2. Demonstrate the use of Excel in calculating the after-tax cash flows used as inputs to the various decision making techniques. 3. Compare and contrast the six major capital budgeting decision techniques payback period discounted payback NPV PI IRR and MIRR . 4. Explain scenario analysis and show how it can be done in Excel. 5. Use Excel s Solver to determine the firm s optimal capital budget under capital rationing. Capital budgeting is the term used to describe the process of determining how a firm should allocate scarce capital resources to available long-term investment opportunities. Some of these opportunities are expected to be profitable while others are not. Inasmuch as the goal of the firm is to maximize shareholder s wealth the financial manager is responsible for selecting only those investments that are expected to increase shareholder wealth. The techniques that you will learn in this chapter have wide applicability beyond corporate asset management. Lease analysis bond refunding decisions mergers 281 282 Capital Budgeting and acquisition analysis corporate restructuring and new product decisions are all examples of where these techniques are used. On a more personal level decisions regarding mortgage refinancing renting versus buying and choosing a credit card are but a few examples of where these techniques are useful. On the surface capital budgeting decisions are simple. If the benefits exceed the costs the project should be accepted otherwise it should be rejected. Unfortunately quantifying costs and benefits is not always straightforward. We will examine this process in this chapter and extend it to decision making under conditions of uncertainty in the next. Estimating the Cash Flows Before we can determine whether an investment will increase shareholder wealth or not we need to estimate the cash flows that it will