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Basics of Capital Budgeting

Basics of Capital Budgeting. Capital Budgeting - Methods/Decisions Rules for Evaluating Capital Projects. Example Projects. Note: No cashflows are expected after year five for either project, and the marginal cost of capital is 10% for each project. Payback Period. Payback Period -

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Basics of Capital Budgeting

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  1. Basics of Capital Budgeting • Capital Budgeting - • Methods/Decisions Rules for Evaluating Capital Projects

  2. Example Projects • Note: No cashflows are expected after year five for either project, and the marginal cost of capital is 10% for each project.

  3. Payback Period • Payback Period - • What is the Payback Period for Oklahoma Oil Outpost? • What is the Payback Period for Western Windmill Warehouse? • Interpreting the Payback Period • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

  4. Discounted Payback Period • Discounted Payback Period - • What is the Discounted Payback Period for Oklahoma Oil Outpost? • What is the Discounted Payback Period for Western Windmill Warehouse? • Interpreting the Discounted Payback Period • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

  5. Net Present Value (NPV) • Net Present Value - • What is the Net Present Value for Oklahoma Oil Outpost? • What is the Net Present Value for Western Windmill Warehouse? • Interpreting the Net Present Value • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

  6. Internal Rate of Return (IRR) • Internal Rate of Return - • What is the Internal Rate of Return for Oklahoma Oil Outpost? • What is the Internal Rate of Return for Western Windmill Warehouse? • Interpreting the Internal Rate of Return (IRR) • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

  7. Crossover Rate • Crossover Rate - • What is the Crossover rate between Oklahoma Oil Outpost (OOO) and Western Windmill Warehouse (WWW)?

  8. Modified Internal Rate of Return (MIRR) • Modified Internal Rate of Return (MIRR) - • What is the MIRR for Oklahoma Oil Outpost? • What is the MIRR for Western Windmill Warehouse? • Interpreting the Modified Internal Rate of Return (MIRR) • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

  9. Profitability Index (PI) • Profitability Index - • What is the Profitability Index for Oklahoma Oil Outpost? • What is the Profitability Index for Western Windmill Warehouse? • Interpreting the Profitability Index (PI) • Decision Rules: • Mutually Exclusive Projects - • Independent Projects - • Deficiencies:

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