Planning Investments: Capital Budgeting

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Presentation transcript:

Planning Investments: Capital Budgeting Chapter 12 Planning Investments: Capital Budgeting

What are the Steps in the Capital Budgeting Process? Identify the opportunity Select appropriate investments Determine how to finance the investments Accept or reject the opportunity

What are the Steps in the Net Present Value Method of Capital Budgeting? Estimate the relevant cash inflows and cash outflows Determine the present value of the future cash flows using the company’s weighted average cost of capital Compute the net present value Accept or reject the proposal

What are the Sources of Cash Inflows? Cash receipts from using the asset (net of tax) Decrease in working capital requirements Sale of old assets (net of tax) Sale of new assets at the end of the project (net of tax) Tax savings due to tax shield

What are the Sources of Cash Outflows? Increase in working capital requirements Cash expenditures from using the asset (net of tax)

What Costs are Included in the Initial Investment Amount? All costs necessary to obtain and get the asset ready for its intended use. Cost of the asset itself Cost to receive the asset (freight, etc.) Cost to setup the asset (installation, etc.)

How is the NPV Determined? (Sum of the present value of cash inflows and outflows) less the initial investment

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