CAPITAL BUDGETING AND

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CAPITAL BUDGETING AND Powered By Docstoc
					  CAPITAL BUDGETING AND
   CASH FLOW PRINCIPLES

       WHAT IS CAPITAL?



      WHAT IS A BUDGET?



  WHAT IS CAPITAL BUDGETING?



DECISIONS IMPORTANT BECAUSE:
1. REPRESENT LARGE EXPENDITURES

  2. L-T COMMITMENT OF FUNDS

3. DIFFICULT & COSTLY TO REVERSE

4. KEY TO ACHIEVING FIRM GOALS
MOTIVES FOR MAKING CAPITAL EXPENDITURES
      --EXPANSION OR ACQUISITION

       --REPLACEMENT OF ASSETS

         --RENEWAL OF ASSETS

         -- OTHER L-T OUTLAYS



5 STEPS IN CAPITAL BUDGETING PROCESS

       1. PROPOSAL GENERATION
        2. REVIEW & ANALYSIS
          3.DECISION MAKING
          4. IMPLEMENTATION
            5. FOLLOW-UP
    CAPITAL BUDGETING TERMS

INDEPENDENT vs. MUTUALLY-EXCLUSIVE

UNLIMITED FUNDS vs. CAPITAL RATIONING

ACCEPT-REJECT APPROACH vs. RANKING

 CONVENTIONAL vs NON-CONVENT’L CFs


      RELEVANT CASH FLOWS:
          ALL INCREMENTAL
         INITIAL INVESTMENT

       OPERATING CASH FLOWS

        TERMINAL CASH FLOW


             SUNK COSTS

         OPPORTUNITY COSTS
         INITIAL INVESTMENT

             1. COST OF NEW ASSET
           + 2. INSTALLATION COSTS
 - 3. PROCEEDS FROM SALE OF OLD ASSET
   + or - 4. TAXES ON SALE OF OLD ASSET
   + or - 5. CHANGE IN WORKING CAPITAL
              INITIAL INVESTMENT



       OPERATING CASH FLOWS

INCREMENTAL REVENUE
- INCREMENTAL EXPENSE (EX. DEPR.)
INCREMENTAL EARNINGS B4 DEPR.
- INCREMENTAL DEPRECIATION
INCREMENTAL EBIT
-INCREMENTAL TAXES
NET OPERATING PROFIT AFTER TAX
+ INCREMENTAL DEPRECIATION
INCREMENTAL OPERATING CASH FLOW
        TERMINAL CASH FLOW

  PROCEEDS FROM SALE OF NEW ASSET
     - TAXES ON SALE OF NEW ASSET
LESS:[PROCEEDS FROM SALE OF OLD ASSET
     - TAXES ON SALE OF OLD ASSET]
      + or - CHANGE IN NET WORKING
              CAPITAL
           TERMINAL CASH FLOW




    ALL THREE COMPONENTS CAN BE
       SUMMARIZED ON TIME LINE

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