Finance Mini Case Chp11

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Mini Case Chapter 11

a. What is capital budgeting?

Capital budgeting is the decision process that managers use to identify those projects that add value to the firm’s value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is

• Analysis of potential additions to fixed assets

• Long term decisions; involving large expenditures

• Very important to a firm’s future

• Define the firm’s strategic directions

b. What is the difference between independent and mutually exclusive projects?

An independent project is one in which accepting or rejecting one project does not affect the acceptance or rejection of other projects under consideration. No relationship exists between the cash flows of one project and another. A mutually exclusive projects is one in which the acceptance of one exclude the acceptance of other projects

c. c. 1. Define the term net present value (NPV).

The net present value is based upon the discounted cash flow technique. To implement this approach find the present value of each cash flow, including the initial cash flow, discounted at the project’s cost of capital, r. Sum these discounted cash flows; this sum is defined as the project’s NPV.

c.1b. What is each franchise's NPV?

|Expected Net Cash Flow | |Year |Franchise L |Franchise S | |0 |($100) | ($100) | |1 |10 |70 | |2 |60 |50 | |3 |80 |20 | | | | | | | | | | | | | | | |Calculator: | |Rate =.10 | |Value = 10,60,80 |...
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