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Tuesday, December 17, 2019

Net Present Value and Capital Budgeting Process - 748 Words

Introduction Investmentgt;gt;Capital Budgeting: The management of long-term (fixed) assets. Ensures investment projects create (vs destroy) value. Financegt;gt;Working capital management: The management of short-term assets and liabilities. Ensures cash inflows = cash outflows at all times. Financegt;gt;Capital Structure: The management of long-term financing. Balances debt amp; equity to maximize value. Payoutgt;gt;Dividends and Share Repurchases: The management of discretionary cash and cash flow. Balances dividend payments and cash retention needs. Value = the discounted sum of cash outflows amp; inflows. The CF capture the economic costs and benefits. Discounting adjusts for cash flow timing and risk. Investment†¦show more content†¦Ignores post Payback CFs Internal Rate of Return (IRR): Discount rate (r = IRR) that sets NPV = 0 accept the IRR gt; discount rate for investing type project. Higher is better Trial and Error Approach: Guess a first value for r, calculate NPV Better: Use IRR() or â€Å"Goal Seek† function Project competing: Choose high NPV rather than instead of high IRR. The Profitability Index (PI): accept the projects which PI gt;1 Problem: Like IRR, PI ignores the scale of the project. NPV says how much value is created, the PI does not. Sunk cost: Irrecoverable past spending 32572461905Capital Asset Pricing Model: Security Market Line (SML) Calculate Rs 00Capital Asset Pricing Model: Security Market Line (SML) Calculate RsFinancial Policy: The Cost of Capital Expected Return amp; Risk Covariance amp; Correlation of Stock 1 and Stock 2 Expected Portfolio Return: Portfolio Variance: STD. Dev =7.00% (= 0.00491/2). Risk Premium aka Sharpe Index: Financial Policy: Capital Structure MM Propositions I amp; II (no taxes): MM I: VL = VU, Leverage does not affect firm value. Corporate leverage = Homemade leverage. MM II: Set RWACC = RSU (ï€ ½Ã¯â‚¬  Unlevered-firm WACC) RSL = RSU + (B/S) (RSU – RB), Cost of equity (amp; risk) rises with leverage, But the WACC is unaffected byShow MoreRelatedStryker: Net Present Value and Capital Budgeting Process1100 Words   |  5 Pages 1. What are the missions of CERs and the capital budgeting process at Stryker? Mission: Standardize and formalize the capital budgeting process. The CERs and capital budgeting process were implemented so that a more formal process of requesting capital expenditure and approving them would be applied. All this was put in place to support cash flow targets and maintain Stryker’s 20% growth benchmark. To what extent have they been shaped by elements of corporate finance theory? They areRead MoreCapital Budget Process With Expansionary Versus Replacement1273 Words   |  6 PagesCapital Budget Process with Expansionary Versus Replacement This report is a comparative analysis of the capital budget process during making decision of expansionary versus replacement. With the objective it is the goal to maximize the wealth company and its shareholders. This process can include expansion or replacement or replacing them and which ones better show capital budgeting will help in processing the difference. Replacement decision concerns whether an existing asset should replaced byRead MoreEssay on Capital 20Budget 20Analysis 20Group 20P1648 Words   |  7 Pagesï » ¿ Capital Budgeting Analysis Amanda Kocanda, DeUndre’ Rushon, HuongTran, Morgan Gibreal MBA 612, Financial Strategy October 28, 2014 Bellevue University Abstract Within this paper, an overview of the general capital budgeting process and how it is implemented within organizations is defined and reported. 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