Copyright © 2007 South-Western. All rights reserved. Chapter 17 Expanding the Business.

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Copyright © 2007 South-Western. All rights reserved. Chapter 17 Expanding the Business

Copyright © 2007 South-Western. All rights reserved.1 Learning Objectives Expanding the Business DecisionsTasks Budgeting Motives Investing

Expanding the Business Copyright © 2007 South-Western. All rights reserved.2 The Key Decisions in Running a Business

Expanding the Business Copyright © 2007 South-Western. All rights reserved.3 Investment Decisions Decisions Tasks Motives Investing Budgeting Capital Budgeting

Expanding the Business Copyright © 2007 South-Western. All rights reserved.4 Classifying Capital Expenditures Decisions Tasks Motives Investing Budgeting ExpensesExpansionDevelopment

Expanding the Business Copyright © 2007 South-Western. All rights reserved.5 Capital Budgeting Tasks Decisions Tasks Motives Investing Budgeting Estimating Feasibility Implementing Proposing Monitoring

Expanding the Business Copyright © 2007 South-Western. All rights reserved.6 Capital Budgeting Tasks Decisions Tasks Motives Investing Budgeting

Expanding the Business Copyright © 2007 South-Western. All rights reserved.7 Mergers Decisions Tasks Motives Investing Budgeting Horizontal Vertical Conglomerate

Expanding the Business Copyright © 2007 South-Western. All rights reserved.8 Motives for Mergers Decisions Tasks Motives Investing Budgeting Growth Economies of Scale Manager Expertise Tax Benefits

Expanding the Business Copyright © 2007 South-Western. All rights reserved.9 Merger Analysis Decisions Tasks Motives Investing Budgeting 1 - Identify 2 - Evaluate 3 - Decision

Expanding the Business Copyright © 2007 South-Western. All rights reserved.10 Merger Procedures Decisions Tasks Motives Investing Budgeting Financing Tender Offer Integrating Evaluation

Expanding the Business Copyright © 2007 South-Western. All rights reserved.11 Merger Issues Decisions Tasks Motives Investing Budgeting Defense LBODivestiture

Expanding the Business Copyright © 2007 South-Western. All rights reserved.12 Short-Term Investments Decisions Tasks Motives Investing Budgeting InventoryLiquidity Accounts Receivable

Expanding the Business Copyright © 2007 South-Western. All rights reserved.13 Present Value Decisions Tasks Motives Investing Budgeting Payment ( 1 + Interest Rate today) Example: $50,000 (1 +.10) PV = $45,455

Expanding the Business Copyright © 2007 South-Western. All rights reserved.14 P.V. of Future Cash Flow Decisions Tasks Motives Investing Budgeting CF at end of Year 1 ( 1 + r) Example: $10,000 (1 +.12) PV = $8,929 CF = Lump sum cash flow r = Required return on investment

Expanding the Business Copyright © 2007 South-Western. All rights reserved.15 P.V. of Future Cash Flow Decisions Tasks Motives Investing Budgeting CF at end of Year 2 ( 1 + r) 2 Example: $10,000 (1 +.12) 2 PV = $7,972 CF = Lump sum cash flow r = Required return on investment

Expanding the Business Copyright © 2007 South-Western. All rights reserved.16 P.V. of Future Cash Flow Decisions Tasks Motives Investing Budgeting CF at end of Year 3 ( 1 + r) 3 Example: $10,000 (1 +.12) 3 PV = $7,118 CF = Lump sum cash flow r = Required return on investment

Expanding the Business Copyright © 2007 South-Western. All rights reserved.17 P.V. of Future Cash Flow Decisions Tasks Motives Investing Budgeting

Expanding the Business Copyright © 2007 South-Western. All rights reserved.18 Net Present Value Decisions Tasks Motives Investing Budgeting Year 1 + Year 2 PV = (1 + r) 1 (1 + r) 2 Example: $8,000 + $12,000 (1 +.15) 1 (1 +.15) 2 PV = $6,957 + $9,074 = $16,031 NPV = PV – I $16,031 - $15,000 = $1,031 Feasible Project