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Capital Budgeting - Coggle Diagram
Capital Budgeting
DCF and Time Value of Money
Analyzing cash inflows and outflows in "Today's dollars"
NPV Analysis (most common)
All cash flows are entered into a timeline
Discount rates are used to approximate "today's worth"
Inputs must be as ACCURATE as possible
Add al DCF's if NPV > 0, it means the project will have a positive return
Average Accounting Return
AAR = ((Increase in after-tax income - Deprn. associated with the project)) / (Net initial investment)
A measure of income divided by the investment amount
Cons
Uses accounting figures, NOT cash flow figures
Does not consider financing costs
Strategic Factors
Strategic Analysis
- Ask "Does this decision align with company strategy"
Difficulty with financial outcome
- Difficult to see quantitative impacts of decisions
Ethics
- Some profitable opportunities that negatively impact a person/group
Non-DCF Methods
Payback Period Method
Determine in how many years an investment will need to pay itself back
Cons
Not linked to economic reality
Does not consider financing cost
Performs poorly for projects with uneven cash flows