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Accounting: You need to understand cap- ital budgeting techniques in order to develop good estimates of the relevant cash flows associated with a proposed capital expenditure and to appreciate how risk may affect the variability of cash flows. Information systems: You need to under- stand capital budgeting techniques,.
What is Capital Budgeting? Long-term decisions, typically involve longer time horizons, cost larger sums of money, and require a lot more information to be collected as part of their analysis, than short-term decisions. The investment of funds into capital or productive assets, which is what capital budgeting entails, meets all
A sunk cost is a cost that has already occurred, so it cannot be part of the incremental cash flows of a capital budgeting analysis. An opportunity cost is what would be earned on the next-best use of the assets. An incremental cash flow is the difference in a company's cash flows with and without the project. An externality is
2.1 Introduction. 2.2 Capital budgeting techniques under certainty. 2.2.1 Non-discounted Cash flow Criteria. 2.2.2 Discounted Cash flow Criteria. 2.3 Comparison of NPV and IRR. 2.4 Problems with IRR. 2.5 Comparison of NPV and PI. 2.6 Capital budgeting Techniques under uncertainty. 2.6.1 Statistical Techniques for Risk
754 0 CHAPTER 20 CAPITAL BUDGETING: METHODS OF INVESTMENT ANALYSIS. Step 3: Make Predictions. Forecast all potential cash flows attributable to the alter- native projects. Capital investment projects generally involve substantial initial outlays, which are recouped over time through annual cash inflows and
Unlike some other types of investment analysis, capital budgeting focuses on cash flows rather than profits. Capital budgeting involves identifying the cash in flows and cash out flows rather than account- ing revenues and expenses flowing from the invest- ment. For example, non-expense items like debt principal payments
Capital Budgeting and Decision Making. Capital budgeting can be used to analyze a wide variety of investments in capital assets. (assets lasting multiple years). A sample of capital budgeting decisions is presented below. Allocating Limited Funds. In many situations, the investment decision is to al- locate a limited amount
The main DCF techniques for capital budgeting include: Net Present Value (NPV), Internal Rate of. Return (IRR), and Profitability Index (PI). Each requires estimates of expected cash flows (and their timing) for the project. Including cash outflows (costs) and inflows (revenues or savings) – normally tax effects are also
Capital Budgeting. Chapter 5. In order to compute the NPV of a project, we need to analyze. 1. Cash flows. 2. Discount rates. 3. Strategic options. We focus on cash flow here and return to discount rate (Part C) and strategic options (Part D) later. 15.401 Lecture Notes c J. Wang. Fall 2006
Capital budgeting refers to the process we use to make decisions concerning investments in the long- term assets of the firm. The general idea is that the capital, or long-term funds, raised by the firms are used to invest in assets that will enable the firm to generate revenues several years into the future. Often the funds raised

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March 2018