Opportunity cost
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This document discusses the importance of considering opportunity costs when making business decisions. It provides examples of how ignoring opportunity costs can be costly for senior management. Managers are advised to map out the cash flows of various options, including the option of doing nothing, and evaluate both monetary and non-monetary impacts to make informed choices. Specifically, the opportunity cost of choosing not to invest in an energy saving project with available financing could be missing out on significant savings over several years.
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This document provides notes on the concept of opportunity cost from an economics class. It defines opportunity cost as the next best alternative forgone when making a decision. It explains that governments and individuals must consider trade-offs when deciding how to spend resources. Finally, it discusses using a decision-making grid to evaluate alternatives and their costs and benefits, and how thinking at the margin is important when making incremental decisions.
Opportunity cost cheyennewujhs
The document compares the opportunities and costs of becoming a motivational speaker or pursuing a career in cosmetology. Becoming a motivational speaker allows for free online classes but requires years of study on topics and building an online presence through videos and blogs. Pay can range greatly from $500 to $50,000 per gig but is not guaranteed. Choosing cosmetology requires two years in beauty school that costs $5,000-$15,000, but offers an average yearly income of $22,500 and working with trends. The author chooses to become a motivational speaker, gaining free schooling and the potential for high income, but losing out on the experience of college, a guaranteed pay, and earning a degree in
1.2 opportunity cost and factors of production
Opportunity cost refers to the next best alternative given up when making a decision. All resources are limited, including capital, land, and labor. When starting a sandwich shop business, opportunity costs must be considered for the land, labor, capital, and entrepreneur involved. Every factor of production is finite - using labor for one task means it cannot be used for another. Opportunity costs affect all decisions made regarding limited resources.
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The document discusses the concept of opportunity cost through examples. It defines opportunity cost as the cost of the next best alternative forgone when choosing between two mutually exclusive options. The first example given is that the opportunity cost of going to university is the earnings forgone from work. The second example is that a gardener's opportunity cost of growing carrots is the alternative crops that could have been grown instead.
Opportunity cost
Every choice involves a trade-off where you must give up something to get something else. The best alternative given up is called the opportunity cost, which is the cost of a decision in terms of the forgone best alternative. For example, the opportunity cost of going to college is the money that could have been earned working instead, and the opportunity cost of a gardener growing carrots is the other crops that could have been grown instead, such as tomatoes or potatoes.
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covers all the essential basic concepts of Economics. Ideal for A Level and IB Economics students.
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The document discusses key economic concepts like scarcity, opportunity cost, and trade-offs. It explains that scarcity means the inability to satisfy all wants, and opportunity cost refers to the best alternative given up when making a choice. Several questions are also posed about applying these concepts, such as what the opportunity cost is of spending time studying different subjects or what resources might be scarce for a factory owner.
Scarcity, trade off, opportunity cost
Scarcity means resources are limited so choices must be made about how to use natural resources, workers, and capital. A trade-off is giving up one thing to get another, like spending on education vs defense. Making choices always has an opportunity cost of forgoing other options.
Opportunity cost
1. Opportunity cost refers to the cost of a decision in terms of the best alternative given up. It is the forgone benefit of the next best alternative when a choice is made.
2. When making choices, whether as consumers, workers, producers, or the government, one must consider opportunity costs and select the option that provides the highest benefit given limited resources.
3. A production possibility curve (PPC) illustrates the maximum quantities of two goods an economy can produce with given resources and technology, and shows the opportunity cost of producing one good in terms of forgone production of the other.
Basic Economic Problems
The document discusses the basic economic problem of scarcity and opportunity cost. It defines the key concepts of needs and wants, and explains that while needs are necessities, wants are pleasurable but not necessary goods. Resources used to produce goods and services are finite but human wants are unlimited, creating an economic problem. The concept of opportunity cost, which is the next best alternative forgone when making a choice due to scarce resources, is introduced and illustrated using a production possibilities frontier diagram showing the tradeoffs between producing two goods.
Opportunity Cost
Opportunity cost refers to the cost of an alternative that must be forgone in order to pursue a certain action or decision. It is the value of the next best alternative that is given up. While opportunity costs do not involve direct monetary payments, they represent the benefits lost from the best alternative forgone. Understanding opportunity costs is important for efficient allocation of scarce resources, as every decision carries an opportunity cost, whether in business, economics, or personal life.
Opportunity Cost
The document discusses the concept of opportunity cost. It defines opportunity cost as what is given up when choosing one option over another. It provides examples to illustrate opportunity cost, such as spending money on movies means giving up spending it on candy or saving it. The document also discusses how every choice has an opportunity cost, whether it is a personal choice or government spending choice, like the opportunity costs of the Iraq war which could have been used to provide healthcare or education.
Opportunity cost powerpoint
The document discusses production possibility curves and opportunity cost using examples from the Great Depression and World War 2 mobilization. During the Great Depression, reduced resources meant the US economy was well inside the production possibility curve. Mobilization for WWII increased productive resources through government spending, increased labor participation, and improved productivity, shifting the curve outward to indicate economic growth.
Introduction to economics
Economics is the study of how individuals and societies make decisions about using scarce resources to fulfill wants and needs. It can be studied at the macro level of whole economies or micro level of individual decision making. Resources are limited so choices must be made between alternatives, which involves tradeoffs. Production requires factors of land, labor, capital and entrepreneurship to transform inputs into goods and services. Firms aim to maximize profits by equating their marginal costs with marginal revenues from sales. Different economic systems approach these decisions in various ways such as traditional economies based on custom, command economies controlled by the government, and free market economies driven by supply and demand.
Fm chapter 8
Capital budgeting refers to a firm's decision to invest funds in long-term assets that are expected to generate benefits over several years. It is important because such decisions influence long-term growth, profitability, and risk. Capital budgeting methods can be divided into non-discounted cash flow methods (such as payback period) and discounted cash flow methods (such as net present value and internal rate of return). The net present value and internal rate of return methods may provide conflicting rankings for mutually exclusive projects under certain conditions related to cash flows and project lives. The net present value method is generally preferred for decision making because it is consistent with maximizing shareholder wealth.
10 Capital Investment DecisionsVladTeodoriStockThinkstoc.docx
10 Capital Investment Decisions
VladTeodor/iStock/Thinkstock
Learning Objectives
After studying Chapter 10, you will be able to:
• Explain the nature and importance of capital investment decisions.
• Identify the relevant cash inflows and outflows in an investment proposal.
• Use four different evaluation methods to evaluate investments.
• Appreciate ethical issues relating to capital investment decisions.
• Comprehend how income taxes and depreciation impact the cash flows of capital investments.
• Understand how the cost of capital is determined.
• Evaluate investment decisions that include inflation, working capital, uneven project lives, differing initial
investments, and asset disposal gains and losses.
• Understand the basic principles of time value of money.
sch84920_10_c10_411-458.indd 411 8/1/17 1:58 PM
© 2017 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.
412
Chapter Outline
10.1 The Importance of Capital Investment Decisions
10.2 The Capital Investment Decision
Cash Flows
Decision Criteria
Time Perspectives
An Example—Equipment Replacement and Capacity Expansion
Formatting the Relevant Data
10.3 The Evaluation Methods
Net Present Value Method
Internal Rate of Return (IRR) Method
Payback Period Method
Accounting Rate of Return Method
10.4 Ethical Issues and Pressures on Management
10.5 Taxes and Depreciation
Income Taxes and Capital Investments
Depreciation Expense
The Tax Shield
10.6 Cost of Capital
10.7 Calculation Issues
Inflation and Future Cash Flows
Working Capital
Uneven Project Lives
Evaluation of Projects With Different Initial Investments
Gains and Losses on Asset Disposals
10.8 The Time Value of Money
Present Value of Money
Present Value of a Series of Future Cash Flows
Present Value Analysis Applied
sch84920_10_c10_411-458.indd 412 8/1/17 1:58 PM
© 2017 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.
413
Capital Investment Alternatives
Rose Stanley, President of Eddington Instruments, grabs her briefcase and heads for
the airport. After clearing security, running to her gate, and just making her flight, Rose
settles into her coach seat, in front of two screaming kids and behind two salespeople who
apparently have just made the deal of the century. She opens her briefcase and finds the
Capital Spending Proposals file. The deadline for submitting proposals to her was yesterday.
She plans to review these on her cross-country flight. The variety surprises her.
• Engineering is pushing to integrate a newly announced semiconductor into an aging
product. The new technology will push Eddington into new markets with great sales
potential but against stiff competition.
• Adding space to the corporate headquarters will bring three administrative
departments together, increase efficiency, and reduce operating expenses.
• Her Production Planning Manager proposes rearranging several work centers to
improve produ ...
ADV. FINANCIAL MANAGEMENT ASSIGNMENT
The document is a project report submitted by Rutuja Deepak Chudnaik for their M.Com degree. The report focuses on comparing the Payback Method and Internal Rate of Return (IRR) Method for capital budgeting and investment decisions. The report includes an introduction to capital budgeting, the objectives and basic principles. It also provides details on the calculation of payback period for projects with constant and uneven cash flows. The report is submitted to the University of Mumbai under the guidance of their project guide, Prof. Dhiren Kanabar.
Whole life science
The document discusses whole life cost analysis and economic measures used to evaluate investment alternatives. It explains that whole life costs should be calculated for each alternative and the option with the lowest cost selected. It then describes four common economic measures - payback period, net savings, savings-to-investment ratio, and internal rate of return - that can help justify additional initial investments by demonstrating future financial benefits. These measures analyze costs, savings, and rates of return to evaluate and compare investment options.
Slide 1 8-1Capital Budgeting• Analysis of potent.docx
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
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This document provides notes on the concept of opportunity cost from an economics class. It defines opportunity cost as the next best alternative forgone when making a decision. It explains that governments and individuals must consider trade-offs when deciding how to spend resources. Finally, it discusses using a decision-making grid to evaluate alternatives and their costs and benefits, and how thinking at the margin is important when making incremental decisions.
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The document compares the opportunities and costs of becoming a motivational speaker or pursuing a career in cosmetology. Becoming a motivational speaker allows for free online classes but requires years of study on topics and building an online presence through videos and blogs. Pay can range greatly from $500 to $50,000 per gig but is not guaranteed. Choosing cosmetology requires two years in beauty school that costs $5,000-$15,000, but offers an average yearly income of $22,500 and working with trends. The author chooses to become a motivational speaker, gaining free schooling and the potential for high income, but losing out on the experience of college, a guaranteed pay, and earning a degree in
1.2 opportunity cost and factors of production
Opportunity cost refers to the next best alternative given up when making a decision. All resources are limited, including capital, land, and labor. When starting a sandwich shop business, opportunity costs must be considered for the land, labor, capital, and entrepreneur involved. Every factor of production is finite - using labor for one task means it cannot be used for another. Opportunity costs affect all decisions made regarding limited resources.
Opportunity cost and governments
The document discusses the concept of opportunity cost through examples. It defines opportunity cost as the cost of the next best alternative forgone when choosing between two mutually exclusive options. The first example given is that the opportunity cost of going to university is the earnings forgone from work. The second example is that a gardener's opportunity cost of growing carrots is the alternative crops that could have been grown instead.
Opportunity cost
Every choice involves a trade-off where you must give up something to get something else. The best alternative given up is called the opportunity cost, which is the cost of a decision in terms of the forgone best alternative. For example, the opportunity cost of going to college is the money that could have been earned working instead, and the opportunity cost of a gardener growing carrots is the other crops that could have been grown instead, such as tomatoes or potatoes.
Introduction to Economics
covers all the essential basic concepts of Economics. Ideal for A Level and IB Economics students.
Topics covered scarcity, opportunity cost, factors of production, normative and positive economics
2 Scarcity, Opportunity Cost, Trade Offs, & Ppc
The document discusses key economic concepts like scarcity, opportunity cost, and trade-offs. It explains that scarcity means the inability to satisfy all wants, and opportunity cost refers to the best alternative given up when making a choice. Several questions are also posed about applying these concepts, such as what the opportunity cost is of spending time studying different subjects or what resources might be scarce for a factory owner.
Scarcity, trade off, opportunity cost
Scarcity means resources are limited so choices must be made about how to use natural resources, workers, and capital. A trade-off is giving up one thing to get another, like spending on education vs defense. Making choices always has an opportunity cost of forgoing other options.
Opportunity cost
1. Opportunity cost refers to the cost of a decision in terms of the best alternative given up. It is the forgone benefit of the next best alternative when a choice is made.
2. When making choices, whether as consumers, workers, producers, or the government, one must consider opportunity costs and select the option that provides the highest benefit given limited resources.
3. A production possibility curve (PPC) illustrates the maximum quantities of two goods an economy can produce with given resources and technology, and shows the opportunity cost of producing one good in terms of forgone production of the other.
Basic Economic Problems
The document discusses the basic economic problem of scarcity and opportunity cost. It defines the key concepts of needs and wants, and explains that while needs are necessities, wants are pleasurable but not necessary goods. Resources used to produce goods and services are finite but human wants are unlimited, creating an economic problem. The concept of opportunity cost, which is the next best alternative forgone when making a choice due to scarce resources, is introduced and illustrated using a production possibilities frontier diagram showing the tradeoffs between producing two goods.
Opportunity Cost
Opportunity cost refers to the cost of an alternative that must be forgone in order to pursue a certain action or decision. It is the value of the next best alternative that is given up. While opportunity costs do not involve direct monetary payments, they represent the benefits lost from the best alternative forgone. Understanding opportunity costs is important for efficient allocation of scarce resources, as every decision carries an opportunity cost, whether in business, economics, or personal life.
Opportunity Cost
The document discusses the concept of opportunity cost. It defines opportunity cost as what is given up when choosing one option over another. It provides examples to illustrate opportunity cost, such as spending money on movies means giving up spending it on candy or saving it. The document also discusses how every choice has an opportunity cost, whether it is a personal choice or government spending choice, like the opportunity costs of the Iraq war which could have been used to provide healthcare or education.
Opportunity cost powerpoint
The document discusses production possibility curves and opportunity cost using examples from the Great Depression and World War 2 mobilization. During the Great Depression, reduced resources meant the US economy was well inside the production possibility curve. Mobilization for WWII increased productive resources through government spending, increased labor participation, and improved productivity, shifting the curve outward to indicate economic growth.
Introduction to economics
Economics is the study of how individuals and societies make decisions about using scarce resources to fulfill wants and needs. It can be studied at the macro level of whole economies or micro level of individual decision making. Resources are limited so choices must be made between alternatives, which involves tradeoffs. Production requires factors of land, labor, capital and entrepreneurship to transform inputs into goods and services. Firms aim to maximize profits by equating their marginal costs with marginal revenues from sales. Different economic systems approach these decisions in various ways such as traditional economies based on custom, command economies controlled by the government, and free market economies driven by supply and demand.
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Fm chapter 8
Capital budgeting refers to a firm's decision to invest funds in long-term assets that are expected to generate benefits over several years. It is important because such decisions influence long-term growth, profitability, and risk. Capital budgeting methods can be divided into non-discounted cash flow methods (such as payback period) and discounted cash flow methods (such as net present value and internal rate of return). The net present value and internal rate of return methods may provide conflicting rankings for mutually exclusive projects under certain conditions related to cash flows and project lives. The net present value method is generally preferred for decision making because it is consistent with maximizing shareholder wealth.
10 Capital Investment DecisionsVladTeodoriStockThinkstoc.docx
10 Capital Investment Decisions
VladTeodor/iStock/Thinkstock
Learning Objectives
After studying Chapter 10, you will be able to:
• Explain the nature and importance of capital investment decisions.
• Identify the relevant cash inflows and outflows in an investment proposal.
• Use four different evaluation methods to evaluate investments.
• Appreciate ethical issues relating to capital investment decisions.
• Comprehend how income taxes and depreciation impact the cash flows of capital investments.
• Understand how the cost of capital is determined.
• Evaluate investment decisions that include inflation, working capital, uneven project lives, differing initial
investments, and asset disposal gains and losses.
• Understand the basic principles of time value of money.
sch84920_10_c10_411-458.indd 411 8/1/17 1:58 PM
© 2017 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.
412
Chapter Outline
10.1 The Importance of Capital Investment Decisions
10.2 The Capital Investment Decision
Cash Flows
Decision Criteria
Time Perspectives
An Example—Equipment Replacement and Capacity Expansion
Formatting the Relevant Data
10.3 The Evaluation Methods
Net Present Value Method
Internal Rate of Return (IRR) Method
Payback Period Method
Accounting Rate of Return Method
10.4 Ethical Issues and Pressures on Management
10.5 Taxes and Depreciation
Income Taxes and Capital Investments
Depreciation Expense
The Tax Shield
10.6 Cost of Capital
10.7 Calculation Issues
Inflation and Future Cash Flows
Working Capital
Uneven Project Lives
Evaluation of Projects With Different Initial Investments
Gains and Losses on Asset Disposals
10.8 The Time Value of Money
Present Value of Money
Present Value of a Series of Future Cash Flows
Present Value Analysis Applied
sch84920_10_c10_411-458.indd 412 8/1/17 1:58 PM
© 2017 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.
413
Capital Investment Alternatives
Rose Stanley, President of Eddington Instruments, grabs her briefcase and heads for
the airport. After clearing security, running to her gate, and just making her flight, Rose
settles into her coach seat, in front of two screaming kids and behind two salespeople who
apparently have just made the deal of the century. She opens her briefcase and finds the
Capital Spending Proposals file. The deadline for submitting proposals to her was yesterday.
She plans to review these on her cross-country flight. The variety surprises her.
• Engineering is pushing to integrate a newly announced semiconductor into an aging
product. The new technology will push Eddington into new markets with great sales
potential but against stiff competition.
• Adding space to the corporate headquarters will bring three administrative
departments together, increase efficiency, and reduce operating expenses.
• Her Production Planning Manager proposes rearranging several work centers to
improve produ ...
ADV. FINANCIAL MANAGEMENT ASSIGNMENT
The document is a project report submitted by Rutuja Deepak Chudnaik for their M.Com degree. The report focuses on comparing the Payback Method and Internal Rate of Return (IRR) Method for capital budgeting and investment decisions. The report includes an introduction to capital budgeting, the objectives and basic principles. It also provides details on the calculation of payback period for projects with constant and uneven cash flows. The report is submitted to the University of Mumbai under the guidance of their project guide, Prof. Dhiren Kanabar.
Whole life science
The document discusses whole life cost analysis and economic measures used to evaluate investment alternatives. It explains that whole life costs should be calculated for each alternative and the option with the lowest cost selected. It then describes four common economic measures - payback period, net savings, savings-to-investment ratio, and internal rate of return - that can help justify additional initial investments by demonstrating future financial benefits. These measures analyze costs, savings, and rates of return to evaluate and compare investment options.
Slide 1 8-1Capital Budgeting• Analysis of potent.docx
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
Capital Budgeting.ppt
Capital budgeting is the process of evaluating long-term investment projects. It involves estimating the future cash flows of a project, including initial costs and future annual cash inflows. Discounted cash flow methods like NPV, IRR and profitability index are commonly used to evaluate projects, but simpler methods like payback period and average rate of return are also used in practice due to uncertainty and limited funds. While NPV is preferred in theory, profitability index may be better when funds are constrained. Multiple techniques are often considered together to make capital budgeting decisions.
Course03
This document provides an overview and summary of the key concepts covered in the course on capital budgeting analysis. It discusses the three stage process of decision analysis, option pricing, and discounted cash flow analysis. It emphasizes that capital expenditures require evaluating all relevant costs and benefits over multiple years. Examples are provided to illustrate how to calculate project cash flows, account for taxes, depreciation, and terminal values to determine the net present value of capital projects.
Capital Budgeting
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
Capital budgeting for small and medium businesses
Discuss practical approaches to supporting investment decisions at small and medium businesses. Discuss DCF and its weaknesses. Discusses infrastructure investments which don't have a clear business case but which are essential.
Capital budgeting
Capital budgeting involves evaluating potential investments to increase a firm's value and profitability. Managers must select projects that earn a return higher than the firm's cost of capital. They consider factors like cash flows, costs, lives, and risks of projects to evaluate them using techniques like net present value, internal rate of return, and payback period. The goal is to accept projects that increase shareholder wealth as measured by the net present value.
Capital budgeting
This document discusses various capital budgeting techniques used to evaluate business investment projects, including net present value (NPV), internal rate of return (IRR), profitability index (PI), payback period, and average rate of return (ARR). It provides examples of how to calculate each metric and explains the appropriate decision rules and limitations of each approach.
Investment decision
This document discusses capital budgeting and methods for evaluating long-term investment projects. It defines capital budgeting as evaluating investments that maximize owner wealth over multiple years. Several evaluation methods are described, including payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI). The document recommends using NPV, as it considers all cash flows and their timing, incorporating the time value of money to determine the true profitability of investments.
Cfd ppt
This document discusses capital budgeting and methods for evaluating long-term investment projects. It defines capital budgeting as evaluating investments that maximize owner wealth over multiple years. Several evaluation methods are described, including payback period, net present value (NPV), internal rate of return (IRR), and profitability index (PI). The document recommends using NPV, as it considers all cash flows and their timing, incorporating the time value of money to determine the true profitability of investments.
Capital budgeting
This document discusses capital budgeting and various techniques used to evaluate capital expenditure projects. It defines capital budgeting as evaluating long-term investments to maximize shareholder wealth. Various criteria used to evaluate projects are discussed, including traditional non-discounted methods like average rate of return and payback period, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. The advantages and disadvantages of each method are also summarized.
Tenant Focus: Winning Efficiency Projects in the Commercial Space
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- The document discusses key concepts in managerial economics including the command process, traditional process, profit for managers vs owners, economic decisions around what, how and for whom, transaction costs, dividend growth model, opportunity costs, depreciation methods, agency problems, risk vs return, and differences between accounting and economic profits.
- It provides answers to questions related to these topics, giving examples and explanations of concepts. Specific examples discussed include how government control impacts the command process, how culture impacts the traditional process, how compensation plans can minimize agency problems, and how implicit costs create differences between accounting and economic profits.
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Capital budgeting and long-term financing decisions..
This document discusses capital budgeting and long-term financing decisions. It explains that capital budgeting involves selecting capital investments and evaluating investment opportunities by weighing costs against benefits. It also discusses that financing decisions are interrelated with investment decisions, as the cost of financing affects investment attractiveness and vice versa. The document outlines several factors to consider in long-term financing choices, such as cost, availability, flexibility, and how financing supports a company's strategy. It concludes that completely separating investment and financing decisions is impossible, as financing options can increase or decrease the attractiveness of investments.
Lecture 3
NPV and IRR are commonly used methods for evaluating investment decisions, but each has limitations. NPV compares the present value of cash inflows to the investment cost, accepting projects where NPV is positive. IRR is the discount rate that sets NPV to zero, accepting projects where IRR exceeds the opportunity cost of capital. However, IRR can indicate acceptance of projects with negative NPV. Managers also consider payback period and accounting rate of return, but these methods ignore timing of cash flows. Cash flows rather than accounting profits drive NPV analysis. Overall, NPV is preferred but multiple methods are often examined when evaluating large capital investments.
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By empowering people to take decisions based on objective data linked to a shared vision people are not simply playing a game according to a set of rules, they are responsible for the game.
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Opportunity cost
- 1. The benefit foregone by choosing one option instead of another
- 2. The cost of choosing an option is the benefit foregone by not choosing an alternative option. This concept is often totally missed by senior management in their decision making process. Did you know there is a cost to doing nothing!
- 3. What is the cost of doing nothing? Perhaps the best way to answer this question is to map out the direct cash flows that would result from doing something as opposed to nothing! Ignoring the time value of money, a simple cash flow forecast can be very enlightening in assisting managers to make informed decisions
- 4. Investment appraisal doesn’t need to be too complex! 1. Map out the specific cash flows for each option 2. List any non-cash benefits for each option 3. Evaluate the non-cash benefits such as reduction in CO2 emissions 4. Make an informed decision
- 5. Example 1 Q. What is the cost of using an invoice factoring facility? A. List the charges and discounting fees that will be incurred THEN CONSIDER THE OPPORTUNITY COST OF NOT HAVING A FACTORING FACILITY.. Having cash could allow you to buy some heavily discounted liquidation stock and if this discount amounted to £10,000 then the opportunity cost of not having cash to complete the purchase would then be……? YES £10,000
- 6. Example 2 Capital Investment in Low Carbon Technology Q. What is the opportunity cost of choosing not to invest in an energy saving project where finance is available solely for that project? A. Map out the cash flow forecast that would result from adopting the project and obtaining the finance and arrive at a Net Present Value for the investment (NPV).
- 7. Summary Always consider the costs associated with doing nothing because they can be considerable 5 years ago a company had an opportunity to invest £150,000 in a LED factory lighting system saving £95,000 per year. The money was made available by The Carbon Trust specifically for the project. If the company had a rule of rejecting any project with a payback of more than 1 year what would have happened?