Engineering Economy IEN255 Chapter 13 - Capital Budgeting Decisions  Capital Budgeting - involves decisions related to fixed assets  Capital Budgeting - the whole process  Choice of financing, schedule of investment opportunities, and estimate of MARR Budgeting!!!!

Engineering Economy Methods of Financing  Investment not independent of source of financing  Equity financing  use of retained earnings otherwise paid to stockholders  issuance of stock ä cost associated with issue (flotation cost)  raise capital to finance projects!

Engineering Economy Example 13.1  Solution only

Engineering Economy Debt Financing  Short term borrowing from banks (term loans)  sale of long-term bonds (bond financing, includes floatation costs )

Engineering Economy Example 13.2  Solution only

Engineering Economy Capital structure Debt Ratio (Capital structure) - percentage of total capital provided by borrowed funds Target Debt Ratio - firm’s desired ratio (if actual debt ratio is below target level, any new capital will probably raised by issuing new debt)

Engineering Economy Cost of Capital  Cost of equity - opportunity cost, rate of return for stockholders ä eqn bottom of 686

Engineering Economy Cost of Retained Earnings all blue eqns on 687 with flotation costs (13.2)

Engineering Economy Cost of Preferred Stock/Equity  Preferred Stock  equity (13.3) (13.4)

Engineering Economy Example 13.4  Solution only

Engineering Economy Cost of Debt  Specific cost of debt component (13.5) Blue part of 691

Engineering Economy Calculating the Cost of Capital  Weighted Average  example 13.6 (13.6)

Engineering Economy Choice of MARR  One value is NOT always right  If Project Financing Known  page 694

Engineering Economy MARR when financing unknown  Depreciation Expenses under Inflation  page 695 and 696

Engineering Economy MARR under Capital Rationing  Page comments

Engineering Economy Capital Budgeting  Terms (independent and dependent projects)  Formulation  IndependentMutually Exclusive  table at top of 702table middle of 702  contingent table at bottom of 702

Engineering Economy Capital Budgeting w/ limited budgets  Solution a) on pg 704 and 705

Engineering Economy Capital Budgeting w/ limited budgets  figure 13.5 and table 13.5

Engineering Economy IEN255 Summer’99 Chapter 10,11,13 HW#4  Homework Assignment: Chapter 10 #’s 10.4; 10.6; Chapter 11 #’s 11.1; 11.6; Chapter 13 #’s 13.9  Due together (Tues July 27)