Capital Budgeting
Capital Budgeting
Luz A comas
Strayer University
Professor: Michael Hamuicka
Financial Management – FIN 534
05/02/2011
Abstract
Capital budgeting is one of the most important areas of financial management. There are several techniques commonly used to evaluate capital budgeting projects namely the payback period, accounting rate of return, present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV), which is the model academics consider superior. The term capital budgeting refers to long term planning for proposal capital outlay and their financing. It includes rising long-term funds and their utilization. It may be defined as firms, formal process of acquisition and investment of capital. Capital Budgeting may also be defined as the decision making process which the firm evaluates the purchase of major fixed assets. It involves firm’s decision to invest its current funds for addition, disposition, modification and replacement of fixed assets. In particular this assignment focused on Bauer Industries. Bauer Industries is an automobile manufacturer. Management is evaluating a proposal to build a plant that will manufacture lightweight trucks. An important responsibility of corporate financial managers is determining which projects or investments a firm should undertake. The assignment shows the mathematical solutions for the problem.
Capital Budgeting 1. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars):
Luz A comas
Strayer University
Professor: Michael Hamuicka
Financial Management – FIN 534
05/02/2011
Abstract
Capital budgeting is one of the most important areas of financial management. There are several techniques commonly used to evaluate capital budgeting projects namely the payback period, accounting rate of return, present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV), which is the model academics consider superior. The term capital budgeting refers to long term planning for proposal capital outlay and their financing. It includes rising long-term funds and their utilization. It may be defined as firms, formal process of acquisition and investment of capital. Capital Budgeting may also be defined as the decision making process which the firm evaluates the purchase of major fixed assets. It involves firm’s decision to invest its current funds for addition, disposition, modification and replacement of fixed assets. In particular this assignment focused on Bauer Industries. Bauer Industries is an automobile manufacturer. Management is evaluating a proposal to build a plant that will manufacture lightweight trucks. An important responsibility of corporate financial managers is determining which projects or investments a firm should undertake. The assignment shows the mathematical solutions for the problem.
Capital Budgeting 1. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars):
References: | | | | | | | | | | | | | | | | | Berk, J, & DeMarzo, P. (2010). Corporate finance: the core: 2010 custom edition. Boston: Pearson Education.