chapter 8 capital budgeting
initial cost formula
IC=IP+ATP-DTP-EQP+TOEor-TCE
internal rate of return
a projects rate of profitability; calculate by dividing the expected net cash flows by the number of periods
incremental cash flow
cash flow created through the implementation of a new project; consists of any cash flow from the project that is greater than the cash flow that currently exists
strengths of Internal ROR
considers cash flows after project paid back; incorporates time value of money
process of capital budgeting
determine initial cost of the project or projects; determine the incremental cash flows of project; select the capital budgeting method; conduct a post-audit analysis
advantages of net present
identifies projects with a positive NPV
weakness for discounted
ignores cash flows after the discounted payback
weaknesses of payback
ignores time value of money; ignores cash flows
strengths of payback period
indicates project's risk and liquidity; easy to calculate
strengths for discounted
indicates risk and liquidity; easy to calculate; incorporates time value of money; more realistic than payback
recent TAMU projects
kyle field; stem buildings; corps of cadets; softball
payback period
number of years required to recover a project's cost; generally the first capital budgeting
discounted payback
number of years required to recover a projects cost using discounted rather than raw cash flows; takes longer than payback
capital budgeting methods
payback period; discounted payback period; net present value; internal rate of return; modified internal rate of return
benefits of capital budgeting
plan amount of resources needed; develop and evaluate alternative capital expenditures; help plan timing of resources; maintain positive ROI
net present value
present value of a projects future cash flows are compared to the projects initial cost; provides best measure of profitability
capital budgeting defined
process of evaluating, comparing, and selecting capital projects to achieve the best return on investment over time
modified internal ROR
recommended in sport due to irregular cash flows
disadvantages
requires detailed prediction of the projects future cash flows; assumes that the discount rate will stay the same
current
short term and completely written off during the year the expense is incurred; usually involve smaller amounts of cash
post audit analysis
this step is often forgotten;
capital expenditure
use of funds to acquire operational assets that will help the organization earn revenues; long term expenditures amortized over a period of time; involve large amounts of cash
