Chapter+11budget5-23财务管理.ppt

CHAPTER 11The Basics of Capital Budgeting Should we build this plant? Projects A series of cash flows. CF0, CF1, CF2, … , CFN What is capital budgeting? Analysis of potential additions to fixed assets. Long-term decisions; involve large expenditures. Very important to firm’s future. What is the difference between independent and mutually exclusive projects? Independent projects – if the acceptance of one are unaffected by the acceptance of the others. Mutually exclusive projects – if the acceptance of one results in the rejection of the others. What is the difference between normal and nonnormal cash flow streams? Normal cash flow stream – Cost (negative CF) followed by a series of positive cash inflows. One change of signs. Nonnormal cash flow stream – Two or more changes of signs. Most common: Cost (negative CF), then string of positive CFs, then cost to close project. Nuclear power plant, strip mine, etc. Capital Budgeting Decision Rules 1. Payback Rule 2. Discounted Payback Rule 3. NPV Rule 4. IRR Rule 5. MIRR Rule What is the payback period? The number of years required to recover a project’s cost, or “How long does it take to get our money back?” Cutoff period is an arbitrary decision criterion. Rule: If a project’s payback period is less than or equal to the cutoff period, then accept the project. Projects L S Cash Flows Project L -100 10 60 80 Project S -100 70 50 20 0 1 2 3 Calculating payback PaybackL = 2 + / = 2.375 years CFt -100 10 60 Cumulative -100 -90 50 0 1 2 3 = 30 80 80 -30 Project L’s Payback Calculation PaybackL = 2.375 years PaybackS = Strengths and weaknesses of payback Strengths Provides an indication of a project’s risk and liquidity. Easy to calculate and understand. Weaknesses Ignores the