BUSINESS FINANCE教学资料 Lecture 8.pptxVIP

Lecture 8 Net Present Value other Investment CriteriaWaquar Ahmadwa0004@surrey.ac.ukOverview of the LectureImportance and Decision Criteria for Capital BudgetingTypes of Projects and cash flowsNon-discounted cash flow methodsPayback periodAccounting rate of returnDiscounted cash flow methodsDiscounted payback methodNet Present Value (NPV)Internal Rate of Return (IRR)Profitability indexThe Balance-Sheet Model of the FirmThe Capital Budgeting DecisionCurrent LiabilitiesCurrent AssetsLong-Term DebtFixed Assets1 Tangible2 IntangibleShareholders’ EquityWhat long-term investments should the firm engage in?Capital Budgeting BasicsImportance of capital budgetinglong-term effect—capital, or long-term funds, raised by the firms are used to invest in assets that enable the firm to generate revenues several years into the future. timing of a decision is important—decisions impact the firm for several years.Good decision criteriaprovide information on whether we are creating value for the firmadjust for the time value of moneyTake risk in accountBasic Concepts - Types of ProjectsConventional vs Non-conventional (Change of sign more than once)A conventional project is one that has an initial cash outflow, followed by one more expected future net cash inflows.Buying a stock or bond.A non-conventional project may have several net cash outflows and inflows.For example, an environmental clean up cost at the end of a project or a major overhaul during the project’s life.Independent vs Mutually Exclusive Two projects are independent if undertaking one does not affect the other. But the limitation is the fund availability.Two projects are mutually exclusive if undertaking one precludes taking the other, even though other projects may be acceptable in terms of the decision rules for independent selection.Potential investment projects: ExamplesStart a new firmExpand to a new market/location/country e.g. You are considering whether you should build a new Hotel in the town centre or in th