Overview (Diujikan) Part 1: The Scope And Environment Of Financial Management Definition of financial management Understanding Financial Statements, Taxes, and Cash Flows Evaluating a Firm's Financial Performance Financial Forecasting, Planning, and Budgeting Part 2: Valuation Of Financial Assets The Value of Money Risk and Rates of Return Valuation and Characteristics of Bonds Stock Valuation Part 3: Investment In Long-term Assets Capital Budgeting Decision Criteria Cash Flows and Other Topics in Capital Budgeting Capital Budgeting and Risk Analysis Cost of Capital Managing for Shareholder Value
Overview (TidakDiujikan) Part 4: Capital Structure And Dividend Policy Raising Capital in the Financial Markets Analysis and Impact of Leverage Planning the Firm's Financing Mix Dividend Policy and Internal Financing Part 5: Working-capital Management And Special Topics In Finance Working-Capital Management and Short-Term Financing Cash and Marketable Securities Management Accounts Receivable and Inventory Management Part 6: Special Topics In Finance Risk Management International Business Finance Corporate Restructuring: Combinations and Divestitures Term Loans and Leases View slide
Chapter 9 CapitaI-Budgeting Decision Criteria Finding Profitable Projects Payback Period Net Present Value Profitability Index (Benefit/Cost Ratio) Internal Rate of Return View slide
Payback Period Payback Period number of years needed to recover the initial cash outlay of the capital budgeting project ignores the time value of money all cash flows that occur after the payback period are ignored discounted payback period the number of years needed to recover the initial cash outlay from the discounted free cash flows.
Payback Period Positive features deal with free cash flows as opposed to accounting profits easy to visualize, quickly understood, and easy to calculate often used as rough screening devices to eliminate projects whose returns do not materialize until later years.
NPV the present value of the free cash flows after tax less the project's initial outlay. The accept-reject criterion
NPV Most favorable for the reasons that: Deals with free cash flows rather than accounting profits Sensitive to the true timing of the benefits resulting from the project Accepted only if a positive net present value, & it will increase the value of the firm Disadvantages: need for detailed, long-term forecasts of free cash flows
Profitability index (PI), or benefit/cost ratio The ratio of the present value of the future free cash flows to the initial outlay. Decision criterion: The net present value and profitability index criteria are essentially the same
Internal Rate of Return The discount rate that equates the present value of the inflows with the present value of the outflows. Decision criterion: If the NPV is positive, then the IRR must be greater than the required rate of return.
Internal Rate of Return The same general advantages and disadvantages as both the net present value and profitability index but has an additional disadvantage: being tedious to calculate if a financial calculator is not available. the NPV method implicitly assumes that cash flows over the life of the project can be reinvested at the project's required rate of return, whereas the use of the IRR method implies that these cash flows could be reinvested at the IRR
Internal Rate of Return Even Cash Flows Uneven Cash Flows NPV-IRR Relationship
Internal Rate of Return Multiple Rates Of Return Modified Internal Rate of Return (MIRR)
Ch. 10 Cash Flows Guidelines For Capital Budgeting An Overview Of The Calculations of A Project's Free Cash Flows Initial outlay Annual cash flow Terminal cash flow Complications In Capital Budgeting: Capital Rationing And Mutually Exclusive Projects
Guidelines Guidelines For Capital Budgeting Use Free Cash Flows Rather Than Accounting Profits Think Incrementally Beware Of Cash Flows Diverted From Existing Products Look For Incidental Or Synergistic Effects Work In Working-capital Requirements Consider Incremental Expenses Remember That Sunk Costs Are Not Incremental Cash Flows Account For Opportunity Costs Decide If Overhead Costs Are Truly Incremental Cash Flows Ignore Interest Payments And Financing Flows
Free Cash Flow Initial outlay: the immediate cash outflow necessary to purchase the asset and put it in operating order. Tax Effects-sale of Old Machine
Free Cash Flow Annual Free Cash Flows Accounting For Interest Accounting For Depreciation And Taxes Depreciation Calculation Working Capital Why Accounting Income Doesn't Measure Up? Terminal Cash Flow
Capital rationing A limit on the dollar size of the capital budget. Indivisible project Rationale Project Selection: the highest net present value Choose A & C
OPTIONS IN CAPITAL BUDGETING Potential to be modified after some future uncertainty has been resolved The option to Delay Expand Abandon The Bottom Line: Because of the potential to be modified in the future after some future uncertainty has been resolved, we may find that a project with a negative net present value based upon its expected free cash flows is a "good" project and should be accepted