and Techniques
Capital Budgeting
Capital Budgeting Basics and Techniques
Project Cash Flows and Risk
Capital Budgeting Basics
Importance of capital budgeting
long-term effectcapital, or long-term funds, raised by
the firms are used to invest in assets that enable the firm
to generate revenues several years into the future.
timing of a decision is importantdecisions impact the
firm for several years.
Generating ideas for capital budgeting
employees, customers, suppliers, and so forth
based on needs and experiences of the firm and these
groups
Capital Budgeting Basics
Project classificationsreplacement decisions versus
expansion decisions
replacement decisionintended to maintain existing levels of
operations
expansion decisiona decision concerning whether the firm
should expand operations
Project classificationsindependent projects versus
mutually exclusive projects
independent projectaccepting one independent project
does not affect the acceptance of any other project
mutually exclusive projectsonly one project can be
purchased
Capital Budgeting Basics
Capital Budgeting Versus Asset Valuation
Value of an asset = PV of the cash flows the asset
is expected to generate during its life:
k) (1
CF
k) (1
CF
k) (1
CF
Value
Asset
n
n
2
2
1
1
+
+ +
+
+
+
=
. . .