12/7 Chapter 19 Flashcards
capital budgeting
the process of making capital investment decisions
two types of capital budgeting projects
independent projects
mutually exclusive projects
independent projects
projects that if accepted or rejected will not affect the cash flows of another project
mutually exclusive projects
projects that if accepted preclude the acceptance of competing projects, it will get rid of the other projects
three main factors
amount cash
timing of payments/receipts
risk
nondiscounting models
ignore the time value of money
discounting models
explicitly consider the time value of money
payback period(nondiscounting)
length of time it takes for cash inflows to recover its initial investment
example:
install an espresso bar
investment required/net annual cash flow
strengths easy screening tool
shortcoming: ignores the time value of money, ignores cash flows after the payback period
accounting rate of return
average incremental income/original investment
measures the return on a project in terms of income, as opposed to using a project’s cash flow
time value of money
a dollar received today is worth more than a dollar tomorrow
compound interest
interest on interest
cash outlfows
working capital, R&M, initial investment, incremental operating cost(ex:wages,variable costs)
cash inflows
release of working capital, salvage value, reduction of costs, incremental revenues
assumptions for this class
all cash inflows come at the end of the period
internal rate of return
….
less flexible than NPV
