Capital Budgeting.ppt

,Term1,2002/(DCF)PresentValue(NPV)InternalRateofReturn(IRR)ProfitabilityIndex(PI),(DCF)PresentValue(NPV),InternalRateofReturn(IRR),andProfitabilityIndex(PI)Eachrequiresestimatesofexpectedcashflows(andtheirtiming)(costs)andinflows(revenuesorsavings)–’srisksothatanappropriatediscountrate(opportunitycostofcapital),–PresentValue(NPV)Method:NPV=PVinflows–PVoutflowsIfNPV≥0,epttheproject;:$100,000Opportunitycostofcapital:15%TheNPVis…YearCashRevenueslessExpensesaftertax1$20,0002-9$40,00010$10,:beforestartingtheevaluationofanewproject,clearpreviousdataandensurethecalculatorissetto1P/:StrengthsandWeaknessesStrengthsResultingnumberiseasytointerpret:–(IRR),IRRcanbedeterminedbysettingupanNPVequationandsolvingforadiscountratethatmakestheNPV=,:Useyourfinancialcalculatororaspreadsheet;IRRusuallycannotbesolved