TTU Sport Finance (Capital Budgeting)
Benefits of capital budgeting
* Plan amount of resources and timing needed *Develop and evaluate alternative capital expenditures *Maintain positive ROI *Focus attention on cash flows
Describe the steps of Capital Budgeting.
1. Determine the initial cost of the project 2. Determine the incremental cash flow of a project. 3. Select the capital budgeting method 4. Conduct a post-audit analysis
A project has an initial cost of $1000. Incremental cash flows are estimated to be $200 each year for 8 years of useful life. Use a discount rate of 8% (PVIF yr 1: .926, yr 2: .857, yr 3: .794, yr 4: .735, yr 5: .681, yr 6: .630, yr 7: .583, yr 8: .540). Calculate the: a. Payback period b. Discount Payback period c. Net present value d. Discuss the conditions under which you would or would not accept the project. Include in your discussion the IRR.
A) Pay Back Period = 5 years B) Discount Payback Period= 6.65 years C) $149.20 D) I would accept the project because you are going to make money in the long run. There also is not a time limit for when you need to pay this money back.
A Capital budget can help...
ensure that the new taxpayer-funded facility will be paid off before the end of its useful life.
