5/12/2021

FINANCE FOR
MANAGERS

2021
PhD. Son Duong Tran - School of Management

M4. CAPITAL
BUDGETING

2021
PhD. Son Duong Tran - School of Management

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Learning Objectives
After studying this module you should be able to:

1. Calculate and interpret the meaning of the payback period, the discounted payback, and the
accounting rate of return of a proposed project; describe their major weaknesses..

2. Calculate and interpret the meaning of the net present value, the present value
index and the internal rate of return for a proposed project.

3. Identify the circumstances for potential conflicts between NPV and IRR and
explain why the NPV method is considered to be the superior technique.

4. In the context of capital budgeting, explain the meaning of the following terms:
incremental cash flow, sunk cost, opportunity cost and erosion.

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Learning Objectives
After studying this module you should be able to:

5. Analyse the relevant cash flows of a project, calculating the tax effect, the net cash
flows, and the discounted cash flows

6. Calculate depreciation, and gains or losses on disposal of depreciable assets for

income tax purposes

7. Evaluate the purchase of equipment with different lives

8. Describe the risk-adjustment techniques of sensitivity, scenario and simulation

analysis, and apply the first two techniques to a project evaluation.

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M4.1:
FINANCIAL EVALUATION
CRITERIA FOR CAPITAL
INVESTMENT DECISIONS

2021
PhD. Son Duong Tran - School of Management

The big picture

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Objective

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NPV Illustrated

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Payback Period

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Payback Period Illustrated

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Disadvantages of Payback Period

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Internal Rate of Return (IRR)

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IRR Example: Project A

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Problems with IRR

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Multiple Rates of Return

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Multiple Rates of Return

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Multiple Rates of Return

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Present Value Profile and Mutually Exclusive Projects

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Present Value Index (PVI)

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Q&A
THANK YOU
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