8/9/2019 Lecture 5 Capital Budgeting Stu

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CAPITAL BUDGETING AND

INVESTMENT CRITERIA

Prepared by Phan Ngoc Anh, MBA

Some examples used in the slides are provided by Nguyen Canh Tien, MSc

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LECTURE OBJECTIVES

Understand the capital budgeting process in evaluating

investment proposal, including:

Net present value

a!bac" period

#iscounted pa!bac" period $optional % &on't test(

)nternal *ate o+ *eturnro+itabilit! )nde

)denti+! the pros and cons o+ these di++erent methods

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CAPITAL ASSETS AND CAPITAL

BUDGETING

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Capital assets, what are they

Capital budgeting!

.nal!sis o+ potential additions to +ied assets

ongterm decisions involves large ependitures

er! important to +irm's +uture

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STEPS TO CAPITAL BUDGETING

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3stimate ash Flo&s $in+lo&s and out+lo&s(

.ssess the ris"iness o+ the cash +lo&s

#etermine the appropriate cost o+ capital

Find N/)**

.ccept/re5ect decisions

8/9/2019 Lecture 5 Capital Budgeting Stu

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INDEPENDENT vs MUTUALLY EXCLUSIVE

vs CONTINGENT PROJECTS

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Independent proects! .cceptance/re5ection o+ one

pro5ect &ould not in+luence the decision regarding other

pro5ects

M"t"#$$% e&c$"s've proects! 7nl! one o+ a number o+

pro5ects can be accepted 9he acceptance o+ one

particular pro5ect means the re5ection o+ other pro5ects

Cont'n(ent proects! .cceptance o+ one pro5ects depends

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NORMAL )CONVENTIONAL* vs NON+NORMAL

)UNCONVENTIONAL* CAS, -LO.S

onventional ash Flo& ro5ect:

7ne change o+ signs

Most common: ost $negative F( +ollo&ed b! aseries o+ positive cash in+lo&s

Unconventional ash Flo& ro5ect:

9&o or more changes o+ signsMost common: ost $negative F(, then string o+

positive Fs, then cost to close pro5ect

"g! nuclear power plant#strip mine

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CONVENTIONAL OR

UNCONVENTIONAL CAS, -LO.S/

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