AFM102 Chapter Notes - Chapter 13: Net Present Value, Discounted Cash Flow, Capital Budgeting

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM102
• Professor: Catherine Wong

Document Summary

Capital budgeting process of planning significant outlays on projects that have long-term implications, such as purchasing new equipment or introducing a new product. Typical capital budgeting decisions: cost-reduction decisions, expansion decisions, equipment selection decisions, lease or buy decisions, equipment replacement decisions. Screening decisions relating to whether a proposed project is acceptable: whether it passes a pre-established profitability hurdle, preference decisions relate to selecting among several acceptable alternatives. The time value of money: capital investments usually earn returns extending over fairly long periods of time, projects that promise returns earlier in time are preferable to those that promise later returns. Emphasis on cash flows: typical cash outflows, most projects have at least three types of cash outflows. Immediate cash outflow in the form of an initial investment in equipment or other assets. Salvage value from sale of old assets can be recognized as a cash inflow or reduction in the required investment.