BFN 110 Lecture Notes - Lecture 13: Capital Budgeting, Project A, Capital Market

• School: Tunxis Community College
• Department: Business – Finance
• Course: BFN 110
• Professor: garside

Document Summary

Explain the strengths and weaknesses of each capital budgeting technique. Irr doesn"t place a monetary value on project, yet npv does. However, each can select different mutually exclusive projects as optimal. Only npv will always maximise shareholder wealth. The firm requires all projects to payback within 1 year. 1 + 75,000/140,000 = 1. 54 > 1 bad. Using payback period only as the criteria would choose a but it doesn"t increase wealth. Discounts cf"s at the cost of capital. More than one project is available but can only accept one. Build an office block or a shopping centre on a piece of land. Cf"s are identical regardless of whether other investments are accepted. Project b all above the required return but b is biggest. Project a largest increase to shareholder wealth. Project blue and green are mutually exclusive. A firm"s aim is to maximise shareholders" wealth. Accept all projects with a positive npv.