Chapter 9 - Capital budgeting techniques: Certainty and risk. This chapter covers the capital budgeting tools that financial managers and analysts use to evaluate the merits of an investment. Some of these techniques are quite intuitive and simple to use, such as payback analysis. Other techniques are a little more complex, such as the NPV and IRR approaches. | Chapter 9 Capital Budgeting Techniques: Certainty and Risk Learning Goals Understand the role of capital budgeting techniques in the capital budgeting process. Calculate, interpret, and evaluate the payback period. Calculate, interpret, and evaluate the net present value (NPV). Learning Goals (cont.) Calculate, interpret, and evaluate the internal rate of return (IRR). Use net present value profiles to compare NPV and IRR techniques. Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach. Learning Goals (cont.) Understand the importance of recognizing risk in the analysis of capital budgeting projects. Discuss breakeven cash flow, sensitivity and scenario analysis, and simulation as behavioral approaches for dealing with risk. Discuss the unique risks that multinational companies face. Learning Goals (cont.) Describe the determination and use of risk-adjusted discount rates (RADRs), portfolio effects, and the practical . | Chapter 9 Capital Budgeting Techniques: Certainty and Risk Learning Goals Understand the role of capital budgeting techniques in the capital budgeting process. Calculate, interpret, and evaluate the payback period. Calculate, interpret, and evaluate the net present value (NPV). Learning Goals (cont.) Calculate, interpret, and evaluate the internal rate of return (IRR). Use net present value profiles to compare NPV and IRR techniques. Discuss NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach. Learning Goals (cont.) Understand the importance of recognizing risk in the analysis of capital budgeting projects. Discuss breakeven cash flow, sensitivity and scenario analysis, and simulation as behavioral approaches for dealing with risk. Discuss the unique risks that multinational companies face. Learning Goals (cont.) Describe the determination and use of risk-adjusted discount rates (RADRs), portfolio effects, and the practical aspects of RADRs. Select the best of a group of mutually exclusive projects using annualized net present values (ANPVs). Explain the role of real options and the objective and procedures for selecting projects under capital rationing. Bennett Company is a medium sized metal fabricator that is currently contemplating two projects: Project A requires an initial investment of $42,000, project B an initial investment of $45,000. The relevant operating cash flows for the two projects are presented in Table and depicted on the time lines in Figure . Capital Budgeting Techniques Chapter Problem Capital Budgeting Techniques (cont.) Capital Budgeting Techniques (cont.) Payback Period The payback method simply measures how long (in years and/or months) it takes to recover the initial investment. The maximum acceptable payback period is determined by management. If the payback period is less than the maximum acceptable payback period, accept the project. If the payback period is greater than .
