CAPITAL BUDGETING ANALYSIS
CAPITAL BUDGETING ANALYSIS
To achieve success over time, a firm’s managers must identify and invest in projects that provide positive net present values to maximize shareholder wealth.
Capital Budgeting
Is the process of identifying, evaluating, and implementing a firms investment opportunities.
Involves long-term projects
Requires large initial investment
Constructing plant and equipment
Time frame maybe as short as a year or as long as twenty to thirty years
The profitability of a firm is affected to the greatest extent by the success of its management in making capital budget investment decisions.
MANAGEMENT OF FIXED ASSETS
Fixed asset management requires financial managers to compare capital expenditures for plant and equipment against the cash flows benefits that will received from this investments over several years.
Proper capital budgeting decisions must be made by the financial manager for this to occur.
The types of decisions include:
Whether to replace existing equipment with new equipment;
Whether to expand existing product lines by adding more plant and equipment similar to that in use;
Or whether to expand into new product areas requiring new types of assets.
Mutually exclusive projects – two or more machines perform the same function.
Independent projects – they are to be evaluated based on their expected effect on shareholder wealth.
OVERVIEW OF THE CAPITAL BUDGETING DECISION
Net present value/net benefit, of an investment is the present value of a project’s cash flows minus its cost:
Net present value = present value of cash flows = cost of the project
20000 100000 80000
-30000 130000
Mission
Objectives
Goals
Strategies
Develop projects plans that fit well with firm plans
CAPITAL BUDGETING PROCESS
1. Identification
2. Development
3. Selection
4. Implementation
5. Follow-up
TABLE 17.1 Examples of Data Needed in Project Analysis EXTERNAL ECONOMIC AND POLITICAL
To achieve success over time, a firm’s managers must identify and invest in projects that provide positive net present values to maximize shareholder wealth.
Capital Budgeting
Is the process of identifying, evaluating, and implementing a firms investment opportunities.
Involves long-term projects
Requires large initial investment
Constructing plant and equipment
Time frame maybe as short as a year or as long as twenty to thirty years
The profitability of a firm is affected to the greatest extent by the success of its management in making capital budget investment decisions.
MANAGEMENT OF FIXED ASSETS
Fixed asset management requires financial managers to compare capital expenditures for plant and equipment against the cash flows benefits that will received from this investments over several years.
Proper capital budgeting decisions must be made by the financial manager for this to occur.
The types of decisions include:
Whether to replace existing equipment with new equipment;
Whether to expand existing product lines by adding more plant and equipment similar to that in use;
Or whether to expand into new product areas requiring new types of assets.
Mutually exclusive projects – two or more machines perform the same function.
Independent projects – they are to be evaluated based on their expected effect on shareholder wealth.
OVERVIEW OF THE CAPITAL BUDGETING DECISION
Net present value/net benefit, of an investment is the present value of a project’s cash flows minus its cost:
Net present value = present value of cash flows = cost of the project
20000 100000 80000
-30000 130000
Mission
Objectives
Goals
Strategies
Develop projects plans that fit well with firm plans
CAPITAL BUDGETING PROCESS
1. Identification
2. Development
3. Selection
4. Implementation
5. Follow-up
TABLE 17.1 Examples of Data Needed in Project Analysis EXTERNAL ECONOMIC AND POLITICAL