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L1 36 Capital Budgeting
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L1 36 Capital Budgeting
(8 decks)
Capital Budgeting
Practice
b describe the basic principles of capital budgeting, including cash flow estimation;
a describe the capital budgeting process, including the typical steps of the process, and distinguish among the various categories of capital projects;
c. explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing;
d calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI);
e explain the NPV profile, compare the NPV and IRR methods when evaluating independent and mutually exclusive projects, and describe the problems associated with each of the evaluation methods;
f describe expected relations among an investment’s NPV, company value, and share price.
