Financial Management

Capital Budgeting

What is a Capital Asset? Why do we budget for them separately? Why do we use cash flow instead of net

income? How do we decide what Capital Projects are

best? What about if there isn’t enough money? How do you convince the CFO to fund your

projects?

Capital Assets Decisions

Payback Period◦ No consideration of inflows after period◦ Doesn’t consider the time value of money

Net Present Value◦ Ignores what is done with the cash inflows◦ Assumes cash flows even far in future .. Are valid

Internal Rate of Return◦ Assumes cash flows even far in future .. Are valid◦ No direct comparison of projects that pay off

quickly

Methods of Analysis

Capital Budgeting Process

Annual costs and inflows Product life Interest Rates Economic conditions Technological Change

Capital BudgetingWhat are the areas of Uncertainty?

Project Net Present Value

Capital BudgetingPayback vs Net Present Value

Capital BudgetingNPV and IRR

NPV and IRR

Capital Budgeting

Cash Flow Analysis

Capital Rationing

Depreciation

Depreciation