Basics of Capital Budgeting  Capital Budgeting -  Methods/Decisions Rules for Evaluating Capital Projects 

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Presentation transcript:

Basics of Capital Budgeting  Capital Budgeting -  Methods/Decisions Rules for Evaluating Capital Projects 

Example Projects  Note: No cashflows are expected after year five for either project, and the marginal cost of capital is 10% for each project.

Payback Period FPayback Period -  What is the Payback Period for Oklahoma Oil Outpost?  What is the Payback Period for Western Windmill Warehouse? FInterpreting the Payback Period  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies:

Discounted Payback Period FDiscounted Payback Period -  What is the Discounted Payback Period for Oklahoma Oil Outpost?  What is the Discounted Payback Period for Western Windmill Warehouse? FInterpreting the Discounted Payback Period  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies:

Net Present Value (NPV) FNet Present Value -  What is the Net Present Value for Oklahoma Oil Outpost?  What is the Net Present Value for Western Windmill Warehouse? FInterpreting the Net Present Value  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies:

Internal Rate of Return (IRR) FInternal Rate of Return -  What is the Internal Rate of Return for Oklahoma Oil Outpost?  What is the Internal Rate of Return for Western Windmill Warehouse? FInterpreting the Internal Rate of Return (IRR)  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies:

Crossover Rate  Crossover Rate -  What is the Crossover rate between Oklahoma Oil Outpost (OOO) and Western Windmill Warehouse (WWW)?

Modified Internal Rate of Return (MIRR) FModified Internal Rate of Return (MIRR) -  What is the MIRR for Oklahoma Oil Outpost?  What is the MIRR for Western Windmill Warehouse? FInterpreting the Modified Internal Rate of Return (MIRR)  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies:

Profitability Index (PI) FProfitability Index -  What is the Profitability Index for Oklahoma Oil Outpost?  What is the Profitability Index for Western Windmill Warehouse? FInterpreting the Profitability Index (PI)  Decision Rules: »Mutually Exclusive Projects - »Independent Projects -  Deficiencies: