CHAPTER 12 RISK TOPICS AND REAL OPTIONS IN CAPITAL BUDGETING FOCUS Traditional capital budgeting techniques compute point estimates of NPV and IRR with no measure of variability. Hence they don’t give managers the information necessary to include a tradeoff between risk and expected return in their decisions. This chapter is concerned with modern approaches to incorporating risk into capital budgeting. The techniques considered include probabilistic cash flows‚ risk adjusted discount rates
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CAPITAL BUDGETING PROBLEM BMW Bike is considering building a new plant. Juan Optimist‚ the company’s marketing manager‚ is an enthusiastic supporter of the new plant. Mila Pessimist‚ the company’s chief financial officer‚ is not so sure that the plant is a good idea. Currently the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new plant. Cost of plant 4‚000‚000 Annual cash inflows 4‚000‚000 Annual cash
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CAPITAL BUDGETING ANALYSIS To achieve success over time‚ a firm’s managers must identify and invest in projects that provide positive net present values to maximize shareholder wealth. Capital Budgeting Is the process of identifying‚ evaluating‚ and implementing a firms investment opportunities. Involves long-term projects Requires large initial investment Constructing plant and equipment Time frame maybe as short as a year or as long as twenty to thirty years The profitability of a firm
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Corporate Finance: The Core (Berk/DeMarzo) Chapter 7 - Fundamentals of Capital Budgeting 1) Which of the following statements is false? A) Because value is lost when a resource is used by another project‚ we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business
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LECTURE 9 CAPITAL BUDGETING CLASS QUESTION (The information below is for question 1 & 2) Toya Motors needs a new machine for production of its 2005 models. The financial vice president has appointed you to do the capital budgeting analysis. You have identified two different machines that are capable of performing the job. You have completed the cash flow analysis‚ and the expected net cash flows are as follows: Expected Net Cash Flow Year Machine B Machine O 0 ($5‚000) ($5‚000) 1 2‚085
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Project-1: Capital Budgeting Simulation MBA AF 620 Objective: The purpose of the Capital Budgeting Simulation project is to explore the problem of resource allocation within a corporation by looking at many projects from the senior-management perspective. This simulation is a useful complement to capital-budgeting cases that focus on single projects. Illustrate the impact of capital rationing on capital investment choices. Exercise and interpret the implication of tools of investment analysis
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TOPIC: CAPITAL BUDGETING IN MNC’s INDEX 1. Meaning of Capital Budgeting …………………. 3 2. Nature of Capital Budgeting …………………….3 3. Procedure of Capital Budgeting………………….3 4. Significance of Capital Budgeting ………………5 5. Basics of Capital Budgeting……………………..6 6. Alternative Capital Budgeting Framework……....8 7. Issues in Foreign
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This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools. Your company is thinking about acquiring another corporation. You have two choices; the cost of each choice is $250‚000. You cannot spend more than that‚ so acquiring both corporations is not an option. The following are your critical data: a. Corporation A: 1) Revenues = 100K in year one‚ increasing by 10%
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importance of capital Budgeting In the world of business‚ capital budgeting is one of the most important steps that a company can take. Many in the business world do not properly understand the importance of capital budgeting. Here are the basics of capital budgeting and why it is important to businesses. What Is Capital Budgeting? Capital budgeting is a process that attempts to determine the future. Before any large project begins‚ the capital budgeting process should be utilized. Without capital budgeting
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Introduction of Capital Budgeting Capital budgeting is the process of identifying‚ analyzing and selecting investment project by a firm which the project expected will generate cash flows over one year. Each potential investment’s value will be estimated by using a Discounted Cash Flow (DCF) valuation in order to find its Net Present Value (NPV). All the incremental cash flows from the investment required estimating the size and timing by using this valuation. The NPV will influence by the discount
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