Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations
The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:
http://boundless.com/teaching-platform
Free to edit, share, and copy
Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:
educators@boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the world’s best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the company’s wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with
Boundless, visit boundless.com.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting > Introduction to Capital Budgeting
Introduction to Capital Budgeting
• Defining Capital Budgeting
• The Goals of Capital Budgeting
• Accounting Flows and Cash Flows
• Ranking Investment Proposals
• Reinvestment Assumptions
• Long-Term vs. Short-Term Financing
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_section_91&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > Introduction to Capital Budgeting
Defining Capital Budgeting
• Capital budgeting, which is also called investment appraisal, is the planning
process used to determine whether an organization's long term investments,
major capital, or expenditures are worth pursuing.
• Major methods for capital budgeting include Net present value, Internal rate of
return, Payback period, Profitability index, Equivalent annuity and Real options
analysis.
• The IRR method will result in the same decision as the NPV method for nonmutually exclusive projects in an unconstrained environment; Nevertheless, for
mutually exclusive projects, the decision rule of taking the project with the highest
IRR may select a project with a lower NPV.
Capital Budeting
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/defining-capitalbudgeting-390-
Capital Budgeting > Introduction to Capital Budgeting
The Goals of Capital Budgeting
• Basically, the purpose of budgeting is to provide a forecast of revenues and
expenditures and construct a model of how business might perform financially.
• Capital Budgeting is most involved in ranking projects and raising funds when
long-term investment is taken into account.
• Capital budgeting is an important task as large sums of money are involved and a
long-term investment, once made, can not be reversed without significant loss of
invested capital.
Private Equity
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/the-goals-of-capitalbudgeting-391-
Capital Budgeting > Introduction to Capital Budgeting
Accounting Flows and Cash Flows
• Accounting flows involve Journal entries, Ledger accounts and Balancing to
present a business's financial position in an Income statement, a Balance sheet
and a Cash flow statement.
• Cash flow is the movement of money into or out of a business, project or financial
product.
• Statement of cash flows includes three parts: Operational cash flows, Investment
cash flows and Financing cash flows.
Accounting cycle
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/accounting-flowsand-cash-flows-392-
Capital Budgeting > Introduction to Capital Budgeting
Ranking Investment Proposals
• The higher the NPV, the more attractive the investment proposal.
• The higher a project's IRR, the more desirable it is to undertake the project.
• As the value of the profitability index increases, so does the financial
attractiveness of the proposed project.
• Shorter payback periods are preferable to longer payback periods.
• The higher the ARR, the more attractive the investment.
Investment Proposal
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/ranking-investmentproposals-393-
Capital Budgeting > Introduction to Capital Budgeting
Reinvestment Assumptions
• If trying to decide between alternative investments in order to maximize the value
of the firm, the reinvestment rate would be a better choice.
• NPV and PI assume reinvestment at the discount rate.
• IRR assumes reinvestment at the internal rate of return.
Reinvestment
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/reinvestmentassumptions-394-
Capital Budgeting > Introduction to Capital Budgeting
Long-Term vs. Short-Term Financing
• Management must match long-term financing or short-term financing mix to the
assets being financed in terms of both timing and cash flow.
• Long-term financing includes equity issued, Corporate bond, Capital notes and so
on.
• Short-term financing includes Commercial papers, Promissory notes, Asset-based
loans, Repurchase agreements, letters of credit and so on.
Financing
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/long-term-vs-shortterm-financing-395-
Appendix
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Key terms
• accounts receivable Accounts receivable also known as Debtors, is money owed to a business by its clients (customers) and
shown on its balance sheet as an asset.
• APT In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds, which holds that the expected
return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices,
where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
• Call option A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this
type of option. [1] The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular
commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a
certain price (the strike price)
• Common stock Common stock is a form of corporate equity ownership, a type of security.
• Default risk Default risk, also known as credit risk, refers to the risk that a borrower will default on any type of debt by failing to
make the obligatory payments.
• discounted cash flow In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using
the concepts of the time value of money.
• Modified Internal Rate of Return The modified internal rate of return (MIRR) is a financial measure of an investment's
attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a
modification of the internal rate of return (IRR) and, as such, aims to resolve some problems with the IRR.
• Preferred Stock Preferred stock (also called preferred shares, preference shares or simply preferreds) is an equity security with
properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.
• Swap In finance, a swap is a derivative in which counterparties exchange cash flows of one party's financial instrument for
those of the other party's financial instrument.
• time value of money The time value of money is the value of money, figuring in a given amount of interest earned over a given
amount of time.
• Weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay
on average to all its security holders to finance its assets.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Capital Budeting
Windows of opportunity come into play when budgeting for capital because they can provide opportunities for firms to maximize returns on investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Google. "Google Images." CC BY
http://www.google.com/imgres?hl=en&biw=1271&bih=595&tbs=sur:fmc&tbm=isch&tbnid=Xchtfc_R83QNEM:&imgrefurl=http://www.fotopedia.com/items/flickr-
Capital Budgeting
Private Equity
Private equity firms, such as NBGI, provide funds for companies unable or uninterested in obtaining funds publicly.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "NBGI Private Equity logo." Public domain http://commons.wikimedia.org/wiki/File%253ANBGI_Private_Equity_logo.png View on Boundless.com
Capital Budgeting
Reinvestment
Reinvestment to expand business
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | 100416-A8647R-001 | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/armyengineersnorfolk/4535262178/sizes/o/in/photostream/
View on Boundless.com
Capital Budgeting
Reinvestment Factor
Describe how the reinvestment factors related to total return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Rate of return." GNU FDL http://en.wikipedia.org/wiki/Rate_of_return View on Boundless.com
Capital Budgeting
Financing
To manage business often requires long-term and short-term financing.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Fotopedia. "Financing - Search for Photos." CC BY http://www.fotopedia.com/search?q=Financing&human_license=reuse_commercial_modify View on
Boundless.com
Capital Budgeting
Cash flow
The movement of money into and out of a business, project or financial product.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Cash Flow | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/23024164@N06/7222346312/sizes/o/in/photostream/ View on
Boundless.com
Capital Budgeting
NPV formula
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore, NPV is the sum of all terms.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Net present value." GNU FDL http://en.wikipedia.org/wiki/Net_present_value View on Boundless.com
Capital Budgeting
Calculation of the MIRR
MIRR is calculated as follows:
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Modified internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Modified_internal_rate_of_return View on Boundless.com
Capital Budgeting
Goals of capital budgeting
The main goal of capital budgeting is to rank projects.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Budget ESA 2010." Public domain http://commons.wikimedia.org/wiki/File:Budget_ESA_2010.png View on Boundless.com
Capital Budgeting
Investment Proposal
Choosing the best investment proposal for business
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. CC BY http://www.flickr.com/photos/fatguyinalittlecoat/3038563145/sizes/o/in/photostream/ View on Boundless.com
Capital Budgeting
Accounting cycle
The basic cycle from open period to close period.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Accounting cycle." CC BY-SA http://commons.wikimedia.org/wiki/File:Accounting_cycle.gif View on Boundless.com
Capital Budgeting
Which of the following is a correct definition of a capital budgeting
method?
A) The internal rate of return is the discount rate that gives a net present
value of zero.
B) Equivalent annuity method essentially value projects as if they were
risk bonds.
C) Real option analysis is the ratio of payoff to investment of a proposed
project.
D) The profitability index is the time required for an investment to "repay"
the original investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a correct definition of a capital budgeting
method?
A) The internal rate of return is the discount rate that gives a net present
value of zero.
B) Equivalent annuity method essentially value projects as if they were
risk bonds.
C) Real option analysis is the ratio of payoff to investment of a proposed
project.
D) The profitability index is the time required for an investment to "repay"
the original investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is a function of corporate capital
budgeting?
A) To rank projects by profitability.
B) To evaluate the performance of managers.
C) To encourage managers to consider problems before they arise.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a function of corporate capital
budgeting?
A) To rank projects by profitability.
B) To evaluate the performance of managers.
C) To encourage managers to consider problems before they arise.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is the correct order of steps in a basic
accounting flow?
A) Analyze the transactions, make journal entries, make adjusting entries,
prepare statements.
B) Analyze the transactions, make journal entries, prepare statements,
make adjusting entries.
C) Make journal entries, analyze the transactions, make adjusting entries,
prepare statements.
D) Make journal entries, prepare statements, analyze the transactions,
make adjusting entries.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is the correct order of steps in a basic
accounting flow?
A) Analyze the transactions, make journal entries, make adjusting entries,
prepare statements.
B) Analyze the transactions, make journal entries, prepare statements,
make adjusting entries.
C) Make journal entries, analyze the transactions, make adjusting entries,
prepare statements.
D) Make journal entries, prepare statements, analyze the transactions,
make adjusting entries.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A company is analyzing a variety of potential investments using
different capital budgeting methods. Which of the following
represents the most profitable choice based on the information
provided?
A) The company picks a project with an accounting rate of return 5% over
one with an ARR of 3%.
B) The company picks a project with a 5 year payback period over one
with a 3 year payback period.
C) The company picks a project with profitability index of 1.25 over a
project with a PI of -.25.
D) The company picks a project with an NPV of $250,000 over one with
an NPV of $300,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A company is analyzing a variety of potential investments using
different capital budgeting methods. Which of the following
represents the most profitable choice based on the information
provided?
A) The company picks a project with an accounting rate of return 5% over
one with an ARR of 3%.
B) The company picks a project with a 5 year payback period over one
with a 3 year payback period.
C) The company picks a project with profitability index of 1.25 over a
project with a PI of -.25.
D) The company picks a project with an NPV of $250,000 over one with
an NPV of $300,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A firm is trying to choose the most profitable project to invest in.
Which of the following should be used as the company's discount
rate?
A) The company's profitability index.
B) The company's weighted average cost of capital.
C) The company's reinvestment rate.
D) The company's internal rate of return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A firm is trying to choose the most profitable project to invest in.
Which of the following should be used as the company's discount
rate?
A) The company's profitability index.
B) The company's weighted average cost of capital.
C) The company's reinvestment rate.
D) The company's internal rate of return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A company needs to obtain short-term financing due to an
unexpected event. Which of the following options should it NOT
pursue to meet its financial needs?
A) Issuing commercial paper.
B) Obtaining an asset-based loan.
C) Issuing corporate bonds.
D) Entering into a repurchase agreement.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A company needs to obtain short-term financing due to an
unexpected event. Which of the following options should it NOT
pursue to meet its financial needs?
A) Issuing commercial paper.
B) Obtaining an asset-based loan.
C) Issuing corporate bonds.
D) Entering into a repurchase agreement.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Attribution
• Wikipedia. "Budget." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Budget
• Wikipedia. "Capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_budgeting
• Wikipedia. "Common stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Common%20stock
• Wikipedia. "Preferred Stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Preferred%20Stock
• Wikipedia. "Capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_budgeting
• Wikipedia. "Modified Internal Rate of Return." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Modified%20Internal%20Rate%20of%20Return
• Wikipedia. "APT." CC BY-SA 3.0 http://en.wikipedia.org/wiki/APT
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikibooks. "Accountancy/Introduction to Accountancy." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Accountancy/Introduction_to_Accountancy#Overview_of_the_accounting_cycle
• College Cram. "Accounting Cycle Overview | Accounting: Accounting Cycle | College-Cram.com." CC BY http://www.collegecram.com/study/accounting/accounting-cycle/accounting-cycle-overview/
• Wikipedia. "Cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow
• Wikipedia. "Default risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Default%20risk
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikipedia. "Accounting rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounting_rate_of_return
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20money
• Wikipedia. "discounted cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/discounted%20cash%20flow
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikipedia. "Dividend reinvestment plan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Dividend_reinvestment_plan
• Wikipedia. "Rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Rate_of_return
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Weighted%20average%20cost%20of%20capital
• Wikipedia. "Corporate finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_finance#The_financing_decision
• Wikipedia. "Corporate bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_bond
• Wikipedia. "Asset-based loan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset-based_loan
• Wikipedia. "Promissory note." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Promissory_note
• Wikipedia. "Money market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Money_market
• Wikipedia. "Capital note." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_note#Convertibles
• Wikipedia. "Letter of credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Letter_of_credit
• Wikipedia. "Asset-backed commercial paper." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset-backed_commercial_paper
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Commercial paper." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Commercial_paper
• Wikipedia. "Call option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Call%20option
• Wikipedia. "accounts receivable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/accounts%20receivable
• Wikipedia. "Swap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Swap
Free to share, print, make copies and changes. Get yours at www.boundless.com