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Chapter 10: Capital BudgetingTheddy B.Feonale (392047)
Tegar Satya Putra (392046)
Capital Budget
List of planned investment
in long term assets
Capital Budgeting :
Whole processes of
analyzing projects and
deciding which ones to
be accepted.
Long Term AssetsProjected
Expenditure
Formula :
DISCOUNTED PAYBACK
Three other issues in capital budgeting are discussed in
this section:
(1) how to deal with mutually exclusive projects whose lives
differ;
(2) the potential advantage of terminating a project before
the end of its physical life; and
(3) the optimal capital budget when the cost of capital rises
as the size of the capital budget increases.
optimal capital budget is defined as the set of projects
that maximizes the value of the firm.
Two problems arise in real world:
(1)The cost of capital might increase as the size of the
capital budget increases, making it hard to know the
proper discount rate to use when evaluating projects;
(2) sometimes firms set an upper limit on the size of their
capital budgets, which is also known as capital rationing
Why capital rationing is quite common:
1. Reluctance to issue new stock
2. Constraints on nonmonetary resources
3. Controlling estimation bias