tailieunhanh - Lecture Contemporary financial management (9th Edition): Chapter 9 - Moyer, McGuigan, Kretlow

Chapter 9 - Capital budgeting: Decision criteria and real option considerations. This chapter looks at capital budgeting decision models. It discusses and illustrates their relative strengths and weaknesses. It examines project review and post-audit procedures, and traces a sample project through the capital budgeting process. | 9 Capital Budgeting: Decision Criteria and Real Option Considerations Introduction This chapter looks at capital budgeting decision models. It discusses and illustrates their relative strengths and weaknesses. It examines project review and post-audit procedures, and traces a sample project through the capital budgeting process. Capital Budgeting Criteria Net present value (NPV) Internal rate of return (IRR) Profitability index (PI) Payback period (PB) Net Present Value The net present value—that is, the present value (PV) of the expected future cash flows minus the initial outlay—of an investment made by a firm represents the contribution of that investment to the value of the firm, and accordingly, to the wealth of the firm’s shareholders. Net Present Value The net present value (NPV) of a capital expenditure project is defined as the present value of the stream of net (operating) cash flows from the project minus the project’s net investment. Net Present Value The net present value method is also sometimes called the discounted cash flow (DFC) technique. The cash flows are discounted at the firm’s required rate of return; that is, its cost of capital. A firm’s cost of capital is defined as its minimum acceptable rate of return for projects of average risk. Net Present Value The net present value of a project may be expressed as follows: NPV = PVNCF – NINV where NPV is the net present value, PVNCF is the present value of net (operating) cash flows, and NINV is the net investment. Net Present Value In general, the net present value of a project can be defined as follows: where k is the cost of capital, n is the expected project life, and is the arithmetic sum of the discounted net cash flows for each year t over the life of the project (n years); that is, the present value of the net cash flows. Net Present Value: Example Net Present Value: Example Net Present Value: Example NPV Characteristics Decision Rule: NPV > 0 acceptable above-normal profits Considers the | 9 Capital Budgeting: Decision Criteria and Real Option Considerations Introduction This chapter looks at capital budgeting decision models. It discusses and illustrates their relative strengths and weaknesses. It examines project review and post-audit procedures, and traces a sample project through the capital budgeting process. Capital Budgeting Criteria Net present value (NPV) Internal rate of return (IRR) Profitability index (PI) Payback period (PB) Net Present Value The net present value—that is, the present value (PV) of the expected future cash flows minus the initial outlay—of an investment made by a firm represents the contribution of that investment to the value of the firm, and accordingly, to the wealth of the firm’s shareholders. Net Present Value The net present value (NPV) of a capital expenditure project is defined as the present value of the stream of net (operating) cash flows from the project minus the project’s net investment. Net Present Value The net present value