際際滷

際際滷Share a Scribd company logo

Week 2 Capital Budgeting

Download as ZIP, PDF
F
Full Sail University

This document discusses capital budgeting techniques for evaluating investment projects, including the time value of money, net present value (NPV), internal rate of return (IRR), and payback period. It provides formulas and explanations for calculating present value, future value, NPV, IRR, and payback period. A template is also included for applying these techniques to sample cash flow data for a project.

1 of 13
Downloaded 50 times
Time Value of Money & Capital Budgeting Net Present Value Internal Rate of Return Payback Period
Time Value of Money The Time Value of Money addresses the concept that a dollar is worth more today than it is at a future point in time. This assumption is based on the fact that often times that dollar can be invested and be earn more at some point in time.
Time Value of Money Present Value What is the value of a future cash 鍖ow TODAY based on a particular discount (interest) rate ? Future Value What is the value of an amount at a particular time in the future based on a speci鍖ed interest rate?
Present Value Present Value Formula Future Cash Flow Present Value = n (1 + r) r = discount (interest) rate n = number of time periods
Future Value Future Value Formula n Future Value = Original Amount x (1 + r) r = interest rate n = number of time periods
Capital Budgeting Capital Budgeting is used to help plan for capital expenditures. The main objective of capital budgeting is to maximize the value of the 鍖rm. It is designed to answer: Which of several mutually exclusive projects should be selected? How many projects should be selected?
Capital Budgeting Options: Payback Period Net Present Value (NPV) Internal Rate of Return (IRR)
Template Use this template for Assignment #4 ONLY enter data in yellow 鍖elds
Cash Flows Initial Outlay of Cash For all calculations, enter future cash 鍖ows in the Income Stream row for the appropriate year. Year 0 represents the initial cash outlay for the investment/ purchase.
Payback Period (Does not consider the TIME VALUE of MONEY) For Payback period, note when the amount reaches zero in the payback period row. This will represent the time in which your initial investment was paid back. Keep in mind: The payback period may fall bet ween years. Determine in which year the investment will be paid back.
Net Present Value (NPV) (Considers the TIME VALUE of MONEY) For Net Present Value, you must know the initial investment, future cash 鍖ows, and the discount rate. Enter the amounts in the appropriate 鍖elds. Net Present Value (NPV) is the summation of the Present Values of all of the future cash 鍖ows.
Internal Rate of Return (IRR) (Considers the TIME VALUE of MONEY) IRR % For Internal Rate of Return (IRR), the Net Present Value must be zero. It is often a guessing game when determining the IRR. By trial and error, enter % in the IRR 鍖eld. Note what the % does to the Net Present Value amount. Continue entering percentages until NPV equals zero (or close to zero).
Week 2 Capital Budgeting

More Related Content

Week 2 Capital Budgeting

  • 1. Time Value of Money & Capital Budgeting Net Present Value Internal Rate of Return Payback Period
  • 2. Time Value of Money The Time Value of Money addresses the concept that a dollar is worth more today than it is at a future point in time. This assumption is based on the fact that often times that dollar can be invested and be earn more at some point in time.
  • 3. Time Value of Money Present Value What is the value of a future cash 鍖ow TODAY based on a particular discount (interest) rate ? Future Value What is the value of an amount at a particular time in the future based on a speci鍖ed interest rate?
  • 4. Present Value Present Value Formula Future Cash Flow Present Value = n (1 + r) r = discount (interest) rate n = number of time periods
  • 5. Future Value Future Value Formula n Future Value = Original Amount x (1 + r) r = interest rate n = number of time periods
  • 6. Capital Budgeting Capital Budgeting is used to help plan for capital expenditures. The main objective of capital budgeting is to maximize the value of the 鍖rm. It is designed to answer: Which of several mutually exclusive projects should be selected? How many projects should be selected?
  • 7. Capital Budgeting Options: Payback Period Net Present Value (NPV) Internal Rate of Return (IRR)
  • 8. Template Use this template for Assignment #4 ONLY enter data in yellow 鍖elds
  • 9. Cash Flows Initial Outlay of Cash For all calculations, enter future cash 鍖ows in the Income Stream row for the appropriate year. Year 0 represents the initial cash outlay for the investment/ purchase.
  • 10. Payback Period (Does not consider the TIME VALUE of MONEY) For Payback period, note when the amount reaches zero in the payback period row. This will represent the time in which your initial investment was paid back. Keep in mind: The payback period may fall bet ween years. Determine in which year the investment will be paid back.
  • 11. Net Present Value (NPV) (Considers the TIME VALUE of MONEY) For Net Present Value, you must know the initial investment, future cash 鍖ows, and the discount rate. Enter the amounts in the appropriate 鍖elds. Net Present Value (NPV) is the summation of the Present Values of all of the future cash 鍖ows.
  • 12. Internal Rate of Return (IRR) (Considers the TIME VALUE of MONEY) IRR % For Internal Rate of Return (IRR), the Net Present Value must be zero. It is often a guessing game when determining the IRR. By trial and error, enter % in the IRR 鍖eld. Note what the % does to the Net Present Value amount. Continue entering percentages until NPV equals zero (or close to zero).