Capital Budgeting Methods

 1999, Prentice Hall, Inc. Ch. 9: Capital Budgeting Decision Criteria

[object Object],[object Object],[object Object],[object Object],Capital Budgeting : the process of planning for purchases of long-term assets.

[object Object],Decision-making Criteria in Capital Budgeting

[object Object],[object Object],[object Object],[object Object],Decision-making Criteria in Capital Budgeting

[object Object],[object Object],Payback Period

[object Object],(500) 150 150 150 150 150 150 150 150 Payback Period 0 1 2 3 4 5 8 6 7

[object Object],Payback period = 3.33 years. Payback Period 0 1 2 3 4 5 8 6 7 (500) 150 150 150 150 150 150 150 150

[object Object],[object Object],[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],Drawbacks of Payback Period:

[object Object],(500) 150 150 150 150 150 (300) 0 0 Consider this cash flow stream! Drawbacks of Payback Period: 0 1 2 3 4 5 8 6 7

[object Object],(500) 150 150 150 150 150 (300) 0 0 This project is clearly unprofitable, but we would accept it based on a 4-year payback criterion! Drawbacks of Payback Period: 0 1 2 3 4 5 8 6 7

[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback

[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250

[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Discounted Payback 0 1 2 3 4 5 (500) 250 250 250 250 250 The Discounted Payback is 2.52 years

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Other Methods

[object Object],Net Present Value NPV = - IO ACF t (1 + k) t n t=1 

Net Present Value ,[object Object],[object Object],[object Object]

[object Object],NPV Example 0 1 2 3 4 5 (276,400) 83,000 83,000 83,000 83,000 116,000

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the HP10B:

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the HP17BII:

[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],NPV with the TI BAII Plus:

Profitability Index NPV = - IO ACF t (1 + k) t n t=1 

t Profitability Index NPV = - IO ACF t (1 + k) t n t=1  PI = IO ACF t (1 + k) n t=1 

Profitability Index ,[object Object],[object Object],[object Object]

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],PI with the HP10B:

[object Object],Internal Rate of Return (IRR)

Internal Rate of Return (IRR) NPV = - IO ACF t (1 + k) t n t=1 

n t=1  Internal Rate of Return (IRR) IRR: = IO ACF t (1 + IRR) t NPV = - IO ACF t (1 + k) t n t=1 

[object Object],[object Object],Internal Rate of Return (IRR) n t=1  IRR: = IO ACF t (1 + IRR) t

[object Object],[object Object],Calculating IRR 0 1 2 3 4 5 (276,400) 83,000 83,000 83,000 83,000 116,000

[object Object],[object Object],[object Object],0 1 2 3 4 5 (276,400) 83,000 83,000 83,000 83,000 116,000

[object Object],[object Object],[object Object],[object Object],0 1 2 3 4 5 (276,400) 83,000 83,000 83,000 83,000 116,000

[object Object],[object Object],[object Object],IRR with your Calculator

IRR ,[object Object],[object Object],[object Object]

[object Object],[object Object]

[object Object],[object Object],(500) 200 100 (200) 400 300 0 1 2 3 4 5

[object Object],[object Object],(500) 200 100 (200) 400 300 0 1 2 3 4 5 1 2 3

[object Object],[object Object],[object Object],[object Object],Summary Problem: 0 1 2 3 4 5 (900) 300 400 400 500 600

Capital Budgeting Methods

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Capital Budgeting Methods