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Sanata Dharma
STRATEGY AND THE ANALYSIS
OF CAPITAL INVESTMENTS
Sanata
niversitas
Dhina/162222105 Olivina/162222113 Rani/162222117
Dharma
Sanata Dharma
Learning Objectives
Sanata
Introductory Definitions
Sanata
Capital budgeting:
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Decision models (e. g., NPV and IRR) for capital budgeting
that explicitly incorporate the time-value-of-money
Weighted-average cost of capital (WACC):
Under normal circumstances, the discount factor used in
DCF capital-budgeting decision models
Estimated as a weighted average of the cost of obtaining
capital from various sources (e.g., equity and debt)
Non-discounted cash flow decision models:
Capital budgeting decision models that do not incorporate
the time-value-of-money into the analysis of capital
investment projects
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Project initiation:
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Transaction
Transaction Calc.
Calc. of
of After-tax
After-tax Cash
Cash Flow
Flow
Cash
Cash receipts
receipts Taxable
Taxable cash
cash receipt
receipt
(1
(1 t)
t)
Cash
Cash expenditures
expenditures Pretax
Pretax cash
cash expense
expense (1
(1
t)
t)
Depreciated
Depreciated Tax
Tax shield
shield Depreciation
Depreciation
expense
expense tt
Allocated
Allocated costs
costs No
No effect
effect
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Note: the cost of using preferred stock is equal to the current dividend
yield on the stock (i.e., current dividend per share of preferred stock
current market price per share)
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(1 +
Integrating
0.10) -1 academic excellence and humanistic v
Dharma
Sanata Dharma
Estimating NPV Using Built-In
Function: Mendoza Company
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General Solution:
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Scenario analysis
Monte Carlo simulation analysis
Integrating academic excellence and humanistic v
Dharma
Sanata Dharma
What-if Analysis
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Scenario Analysis:
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Disaster Scenario
Disappointing Scenario
Optimistic Scenario
Monte Carlo Simulation Analysis:
Decision inputs subjected to probability
distribution
Use of simulation (e.g., @ RISK Excel add-on)
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Easy to compute
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Note: if the discounted payback period is less that the life of the
project, then the project must have a positive NPV
Strength:
Takes into consideration the time value of money
Weaknesses:
Can motivate excessive short-term investments
Returns beyond the payback period are ignored
Decision rule for project acceptance is ambiguous/
subjective
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income Average
investment
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Accounting $58,000
= = 13.14%
Rate of Return $441,500
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Advantages:
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TERIMA KASIH