Net Present Value and Capital Budgeting Process - 748 Words

Introduction Investmentgt;gt;Capital Budgeting: The management of long-term (fixed) assets. Ensures investment projects create (vs destroy) value. Financegt;gt;Working capital management: The management of short-term assets and liabilities. Ensures cash inflows = cash outflows at all times. Financegt;gt;Capital Structure: The management of long-term financing. Balances debt amp; equity to maximize value. Payoutgt;gt;Dividends and Share Repurchases: The management of discretionary cash and cash flow. Balances dividend payments and cash retention needs. Value = the discounted sum of cash outflows amp; inflows. The CF capture the economic costs and benefits. Discounting adjusts for cash flow timing and risk. Investment†¦show more content†¦Ignores post Payback CFs Internal Rate of Return (IRR): Discount rate (r = IRR) that sets NPV = 0 accept the IRR gt; discount rate for investing type project. Higher is better Trial and Error Approach: Guess a first value for r, calculate NPV Better: Use IRR() or â€Å"Goal Seek† function Project competing: Choose high NPV rather than instead of high IRR. The Profitability Index (PI): accept the projects which PI gt;1 Problem: Like IRR, PI ignores the scale of the project. NPV says how much value is created, the PI does not. Sunk cost: Irrecoverable past spending 32572461905Capital Asset Pricing Model: Security Market Line (SML) Calculate Rs 00Capital Asset Pricing Model: Security Market Line (SML) Calculate RsFinancial Policy: The Cost of Capital Expected Return amp; Risk Covariance amp; Correlation of Stock 1 and Stock 2 Expected Portfolio Return: Portfolio Variance: STD. Dev =7.00% (= 0.00491/2). Risk Premium aka Sharpe Index: Financial Policy: Capital Structure MM Propositions I amp; II (no taxes): MM I: VL = VU, Leverage does not affect firm value. Corporate leverage = Homemade leverage. MM II: Set RWACC = RSU (ï€ ½Ã¯â‚¬  Unlevered-firm WACC) RSL = RSU + (B/S) (RSU – RB), Cost of equity (amp; risk) rises with leverage, But the WACC is unaffected byShow MoreRelatedStryker: Net Present Value and Capital Budgeting Process1100 Words   |  5 Pages 1. What are the missions of CERs and the capital budgeting process at Stryker? Mission: Standardize and formalize the capital budgeting process. The CERs and capital budgeting process were implemented so that a more formal process of requesting capital expenditure and approving them would be applied. All this was put in place to support cash flow targets and maintain Stryker’s 20% growth benchmark. To what extent have they been shaped by elements of corporate finance theory? 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