tailieunhanh - Ebook Capital budgeting - Theory and practice pamela: Part 2

(BQ) Part 2 book "Capital budgeting - Theory and practice pamela" has contents: Comparing evaluation techniques and some concluding thoughts, measurement of project risk, incorporating risk in the capital budgeting decision, valuing a lease, uncertainty and the lease valuation model, generalization of the lease valuation model. | Chapter 9 Comparing Evaluation Techniques and Some Concluding Thoughts T he results of our calculations using the six techniques we have discussed are summarized in Exhibit 1. If each of the eight projects are independent and are not limited by capital rationing, all projects except investment H are expected to increase owners’ wealth. Suppose each project is independent, yet we have a capital budget limit of $5 million on the total amount we can invest. Since each of the eight projects requires $1 million, we can only invest in five of them. Which five projects do we invest in? In order of NPV, we choose: D, B, A, E, and F. We would expect the value of owners’ wealth to increase by $6,160,172 + 552,620 + 516,315 + 298,843 + 222,301 = $7,750,251. Now suppose that each pair of projects is a set of mutually exclusive projects. Which project of each mutually exclusive pair is preferred? Investments B, D, E, and G are preferred, choosing the projects with the higher NPV of each pair. Exhibit 1: Summary of the Evaluation of the Investment Projects Required rate of Investment return A 10% B 10% C 10% D 10% E 5% F 5% G 5% H 10% Discounted Net Internal Modified payback present Profitability rate of internal rate Payback period value return of return period index 3 years 4 years $516,315 4 years 5 years 552,620 4 years 4 years 137,236 4 years 4 years 6,160,172 4 years 4 years 298,843 4 years 5 years 222,301 4 years 5 years 82,369 4 years not paid back −52,303 103 104 Comparing Evaluation Techniques and Some Concluding Thoughts If you are considering mutually exclusive projects, the NPV method leads us to invest in projects that maximize wealth. If your capital budget is limited, the NPV and PI methods lead us to the set of projects that maximize wealth. SCALE DIFFERENCES Scale differences (differences