with child(p) budgeting is a required managerial tool. nonpareil duty of a financial manager is to choose investments with hunky-dory coin flows and rates of return. Therefore, a financial manager essential be able to decide whether an investment is worth undertaking and be able to choose intelligently between ii or more alternatives. To do this, a sound number to evaluate, compare, and select foxs is needed. This procedure is called capital budgeting.
Basic Steps of Capital Budgeting
1.Estimate the cash flows
2.Assess the riskiness of the cash flows.
3. understand the appropriate discount rate.
4.Find the PV of the expected cash flows.
5. borrow the project if PV of inflows > costs. IRRÂ >Â Hurdle Rate and/or
payback < policy
Definitions:
Independent versus inversely exclusive projects.
? Independent projects if the cash flows of single are untouched by the toleration of the other.
? Mutually exclusive projects if the cash flows of one can be adversely impacted by the acceptance of the other.
Normal versus nonnormal projects.
? Normal cash flow stream cost (negative CF) followed by a series of positive cash inflows. champion change of signs.
? Nonnormal cash flow stream Two or more changes of signs. Most common: Cost (negative CF), then caravan of positive CFs, then cost to close project.
Nuclear provide plant, strip mine, etc.
III. Evaluation Techniques
? requital item method
? Discounted payback period method
? Net present value
? Internal Rate of Return
? Modified IRR;MIRR
B.
a. payback Period
? The number of years required to repossess a projects cost, or How long does it take to get our funds back?
? Calculated by adding projects cash inflows to its cost until the cumulative cash flow for the project turns positive.
Payback period = Expected number of years required to recover a projects cost.
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PaybackL = 2 + $30/$80 years
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