韩山师范学院财务管理课件第十二章 The Capital Budgeting Decision.ppt

Chapter 12 The Capital BudgetingDecision Chapter 12 - Outline LT 12-1 What is Capital Budgeting? 3 Methods of Evaluating Investment Proposals Accept/Reject Decision Capital Rationing Net Present Value Profile Determining Whether to Purchase a Machine What is Capital Budgeting? LT 12-2 Capital Budgeting: – represents a long-term investment decision – involves the planning of expenditures for a project with a life of many years – usually requires a large initial cash outflow with the expectation of future cash inflows – uses present value analysis – emphasizes cash flows rather than income 3 Methods of Evaluating Investment Proposals LT 12-3 There are 3 widely used methods of evaluating investment proposals: Payback Method (PB) Internal Rate of Return (IRR) Net Present Value (NPV) Payback Method LT 12-4 Payback Method (PB): – computes the amount of time required to recoup the initial investment – a cutoff period is established Advantages: – easy to use (“quick and dirty” approach) – emphasizes liquidity Disadvantages: – ignores inflows after the cutoff period and fails to consider the time value of money – is inferior to the other 2 methods Internal Rate of Return LT 12-5 Internal Rate of Return (IRR): – represents a yield on an investment or an interest rate – requires calculating the interest rate that equates the cash outflows (cost) with the cash inflows – is the interest rate where the cash outflows equal the cash inflows (or NPV = 0) Net Present Value LT 12-6 Net Present Value (NPV): – the present value of the cash inflows minus the present value of the cash outflows – the cash inflows are discounted back over the life of the investment – the basic discount rate is usually the firm’s cost of capital (WACC) Accept/Reject Decision LT 12-7 Payback Method (PB): –if PB period cutoff period, accept the project – if PB period cutoff period, reject the project Internal Rate