Management and Organizational Studies 3311A/B Lecture Notes - Lecture 6: Cash Flow, Capital Budgeting, Net Present Value

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3311A/B
• Professor: Jun Wang

Document Summary

Topic 5: capital budgeting (chapters 8 & 9) Selecting long-term investment projects that achieve the goal of shareholder wealth maximization. Capital budgeting decisions are treated separately from the related financing decisions. Identify when the firm receives/pays the cash flow: the risk of the project compared to other alternatives, return of the project. Other criteria, except for npv, are sometimes used by firms when evaluating investment opportunities. Some of these have fundamental flaws but are still used as rules of thumb : payback period, average accounting return. Some of these criteria simply need to be used with care: internal rate of return. Calculates the pv of all incremental cash inflows and outflows. The present value of future cash flows minus today"s current initial investment. Npv is the addition or reduction to the existing firm"s value: measure of incremental wealth. C0- initial cash flow: usually negative. Inputs: forecast of timing and magnitude of cfs, estimate of risk of cfs.