Chapter 10, the fundamentals of capital budgeting. After studying this chapter you will be able to: What is capital budgeting? Steps to capital budgeting, What is the difference between independent and mutually exclusive projects? Calculating payback, strengths and weaknesses of payback,. | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 10: The Fundamentals of Capital Budgeting Learning Objectives Discuss why capital budgeting decisions are the most important investment decisions made by a firm’s management Explain the benefits of using the net present value (NPV) method to analyze capital expenditure decisions and calculate the NPV for a capital project Describe the strengths and weaknesses of the payback period as a capital expenditure decision-making tool and compute the payback period for a capital project Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain why the account rate of return (ARR) is not recommended for use as a capital expenditure decision-making tool Compute the internal rate of return (IRR) for a capital project and discuss the conditions under which the IRR technique and the NPV technique produce different results Copyright© 2015 John Wiley & Sons, Inc. 4 Learning Objectives Explain how the profitability index can be used to rank projects when a firm faces capital rationing and describe the limitations that apply to the profitability index Explain the benefits of post-audit and periodic reviews of capital projects Copyright© 2015 John Wiley & Sons, Inc. 5 The Importance of Capital Budgeting Capital budgeting decisions are the most important investment decisions made by management These decisions determine the long-term productive assets that will create wealth for a firm’s owners Capital investments are large cash outlays, long-term commitments, not easily reversed, and primary factors in a firm’s long-run performance Capital budgeting techniques help management systematically analyze potential opportunities in order to decide which are worth undertaking Sources of Information Most of the information needed to make capital budgeting decisions is generated internally, often beginning with the sales force | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 10: The Fundamentals of Capital Budgeting Learning Objectives Discuss why capital budgeting decisions are the most important investment decisions made by a firm’s management Explain the benefits of using the net present value (NPV) method to analyze capital expenditure decisions and calculate the NPV for a capital project Describe the strengths and weaknesses of the payback period as a capital expenditure decision-making tool and compute the payback period for a capital project Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain why the account rate of return (ARR) is not recommended for use as a capital expenditure decision-making tool Compute the internal rate of return (IRR) for a capital project and discuss the conditions under which the IRR technique and the NPV technique produce different results .
