Please enable JavaScript.

Coggle requires JavaScript to display documents.

Capital budgeting - Coggle Diagram

- - - - Unlimited --> inde --> all accepted
      - Cap rationing --> mutu
    - - acc-reject
        
        involves evaluating capital expenditure proposals to determine whether they meet the firm’s minimum acceptance criterion
      - ranking approach
        
        involves ranking projects on the basis of some predetermined measure --> choose highest
    - - Mutu: The acceptance of one eliminates from further consideration all other projects w/ similar funcs
      - Inde: acceptance of one project does not eliminate the others
- - - - NPV assumes that intermediate cash inflows are reinvested at the cost of capital
      - IRR assumes that intermediate cash inflows are reinvested at a rate equal to the project’s IRR.
  - - - IRR approach just as
        often as the NPV method
        
        NPV less intuitive because it does not measure benefits relative to the amount invested
        
        a variety of techniques are available for avoiding the pitfalls of the IRR
    - - NPV
        
        measures how much wealth a project creates
        
        not exhibit the mathematical problem
        of multiple IRRs that often occurs when IRRs are calculated for nonconventional cash flows
- - - - why
        
        consider time value of money (buying power)
        
        provides concrete no to compare PV of return and initial outlay
      - in deciding to make large purchases
      - merger and acquisition
    - - calculations based on assumption and estimates --> double checking + sensitive analysis
        
        discount rate
        
        returns
        
        ppl tend to be optimistic
        
        initial investment
      - hard to explain to others
    - - compare PV of future CF at required rate of return to initial investment
  - - - option 1 more valuable
    - - programs last longer than 3y --> certainty hard to exact
        
        for eg: invest in ipod, kindle, ...
      - need to think of the investment more complex
      - VC
        
        look at young companies
      - large corps
        
        look at ROI, IRR --> horizons too short
    - - 10m return 20m 100%
      - 1m return 3m 50%
    - - what required to leave the option
      - what if it works
      - do we have what it takes
  - - - IRR more intuitive
      - IRR more conceptual than NPV
        
        doesnt give real money
    - - consider how IRR takes into account TVM
      - use IRR alone
    - - rate at which the prj breaks even