BUS 295 Lecture Notes - Lecture 20: Net Present Value, Capital Budgeting, Cash Flow
Document Summary
Capital budgeting techniques are used to evaluate different investment alternatives. For instance, should the firm build a new plant, purchase a new machine to replace an old one, launch a new product, etc. Similar valuation techniques can also be used to value whole firms or subsidiaries of firms. For instance, capital budgeting techniques can be used to value ipo"s and potential takeover targets, as well as providing estimates of the value of private firms for tax purposes (inheritance). Long-term investments generally fall into two categories: replacement projects (cost reduction or revenue maintenance projects, expansion projects (revenue expansion) forecasting cash flows is more difficult for these projects. Four stages to a capital budgeting decision: project development and classification, estimation of cash flows, decision rules, risk considerations. For our purposes, we"ll assume the project stage has already been done. We"ll first assume we have the cash flows estimated as well and discuss types of decision rules.
