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ACF W2: CAPITAL BUDGETING - Coggle Diagram
ACF W2: CAPITAL BUDGETING
capital budgeting process
process
identify investment opportunities
regularly assess external environment and trends
gather investment proposals
3.make decisions
prepare and appropriate capital budget
5.implement
review performance
swot analysis
strength
weekness
opportunities
threat
definition:
planning expenditures for assets with long-term (>1y) cash flow
3 steps
develop capital budget
identify capital expenditures options
operating management
advertising
production
marketing
to find potential budget cash inflows and outflows
develop strategic business plan
attract financing and meet objectives
define company's goals and conduct research and understand trend
tools track growh, establish budget, prepare for unforeseen changes
analyze capital project alternatives
NPV
IRR
PI
pay back period
accounting/book rate of return
project types
independent
mutually exclusive
cash flow of capital investment project
3 elements
total cash flow
= cash flow from capital investment
(negative)
+ operating cash flow
(positive)
+ cash flow from changes in working capital
(negative)
working capital
short-term financial health
current assets - current liabilities
operating cash flow = (revenue - cost)(1-tax) + depreciation * tax
what to discount
cash flow not profit
incremental cash flow not non-incremental
treat inflation consistently
forecast cash flow after tax
seperate investment vs financing decisions
2 types of depreciation
accelerated
higher NPV
straight line
NPV rule
investment timing decision
= net FV/(1+discount rate)^period
some projects are more valuable if undertaken in the future -> determine when to end projects to maximize profit
equivalent annual cash flow EAC
= PV of cash flow/annuity factor
annuity factor = 1/(1+discount rate) + 1/(1+discount rate)^2+ 1/(1+discount rate)^t
to make choices between long and short-lived projects
to decide when to replace old machine
cost of using spare capacity
project analysis
sensitivity analysis
determine surprise events and their implications
to modify the projects -> resolve uncertainy b4 untaking investmnet
mostly consider
COGS
and
number of units sold
limits
lack of info
misestimation
ambiguous results
interrelated variables
-> use 1 variable to measure movement of NPV
scenario analysis
for interrelated variables
consider alternative plausible scenarios
break-even analysis
determine break-even point where NPV=0
COGS
is most important variable
operating levearage
degree of operating leverage
DOL
= % profit change/% change in sales
=> 1% increase in revenue -> DOL % change in profit
= 1+ [(fixed cost +depreciation)/profits]
monte carlo simulation
model process
model the project
specify probabilities
simulate cash flow
calc PV
to calc possibility distribution of possible outcomes of project