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Cid Introppt
Cid Introppt
Cid Introppt
Course Contents
Introduction Cash Flow Estimation Determination of cash out flow and cash inflows Techniques of Capital Budgeting Discounted (NPV, IRR, MIRR, PI, and DPB) and non-discounted (PB & AAR) cash flow techniques, decision criteria, advantages and disadvantages of each technique. Special Issues in Capital Budgeting Projection evaluation, costcutting projects, bid price setting, projects with different lives. Project Analysis and Evaluation Forecasting risk, sensitivity and scenario analysis, break-even analysis, operating leverage and capital budgeting.
Inflation and Capital Budgeting Options in Capital Budgeting Capital Budgeting for Levered Firm Risk, Cost of Capital and Capital Budgeting Risk and Capital Budgeting Absolute measure and relative measure of risk, certainty equivalent method and risk adjusted discount rate method.
Course Evaluation
Class Attendance ----- 10 Mid-term I -----------15 Mid-term II ----------15 Class Test/Quiz --------10 Term Paper/Pres.------10 Final Exam -------------40 Total --------------------100
CLASSIFICATION OF PROJECTS
By Size: Major Project. Minor Project. By Benefit: Cost Reduction Project. Market Expansion Project. Project for new products.
CLASSIFICATION OF PROJECTS
By Degree of Dependence:
Mutually Exclusive Projects. Independent Projects.
PCF
B) DCF techniques include the following: i) Net Present Value (NPV) ii) Internal Rate of Return (IRR) iii) Profitability Index (PI) or Benefit-Cost Ratio (BCR) iv) Discounted Payback Period Method
Advantages:
Easy to understand Biased toward liquidity
Advantages:
The accounting information is usually available Easy to calculate
Ranking Criteria:
Select alternative with the highest IRR
Reinvestment assumption:
All future cash flows assumed reinvested at the IRR.
Disadvantages:
IRR may not exist or there may be multiple IRR Problems with mutually exclusive investments
Advantages:
Easy to understand and communicate
0 -$200
Multiple IRRs
There are two IRRs for this project:
$200 0 -$200
NPV $100.00 $50.00 $0.00 -50% 0% ($50.00) ($100.00) ($150.00) 50% 100% 150% 200%
100% = IRR2
0% = IRR1
Discount rate
-$10,000 The preferred project in this case depends on the discount rate, not the IRR.
Project A Project B
NPV
12.94% = IRRB
Discount rate
16.04% = IRRA
Independent Projects: accepting or rejecting one project does not affect the decision of the other projects.
Must exceed a MINIMUM acceptance criteria.
Ranking Criteria:
Select alternative with highest PI
Disadvantages:
Problems with mutually exclusive investments
Advantages:
May be useful when available investment funds are limited Easy to understand and communicate Correct decision when evaluating independent projects
The most frequently used technique for large corporations is IRR or NPV.