【正文】 erent lives, how to evaluate and paring their NPVs? Suppose that there are two mutually exclusive projects, A and B, K=10% and their NCFs are presented in the following table. Year 0 1 2 3 n NPV(K=10%) Project A 1000 600 600 2 41 Project B 1000 400 400 475 3 50 By calculation, NPVA = 41。 Budgeting=Plan detailing projected cash inflows and outflows during some future period, thus “Capital Budgeting” outlines the planned expenditures on fixed assets. 1. Multiconcepts for Capital Budgeting (1) Capital Investment Analysis Decision (2) Economic Evaluation of Investment Projects (3) Technological Economics (4) Investment Feasibility Study2. A Formal Definition of Capital Budgeting Capital budgeting is a filed of finance concerned with cost and benefit, and return and risk derived from investment project undertaken by a firm. The capital budgeting is a procedure include a set of systematic techniques dealing with how to evaluate and select investment projects under certainty or uncertainty. 廈門大學(xué)管理學(xué)院吳世農(nóng) Market Research Investment Sources Cost CBA Expenditures of Capitals Marketing Strategy Costs Ine R Profits Statement Risk Investment Analysis D Management Assets Balance Liabilities Sheet Production Finance Cash Inflow Cashflow Repayment Opportunity Study Cash Outflow Statement Analysis Preliminary Discussion Feasibility Discussion Final Proposals Study Report Exhibit 1: Diagram Suggested for Investment Project’s Feasibility Study in Firms 廈門大學(xué)管理學(xué)院吳世農(nóng) Technological Macroeconomic Feasibility Feasibility Financial Implementation Operation Feasibility Social/Cultural Environmental Feasibility Feasibility Comprehensive Review Post Feasibility Report Assessment Exhibit 1 (Continuos): Diagram Suggested for Investment Project’s Feasibility Study in Firms Advanced Topics in Capital BudgetingII. Conflicts between NPV and IRR for Mutually Exclusive Projects1. Size Effect of Investment Outlay on NPV and IRR(1) Conflict——Which Maximizes Shareholder’s Wealth? Suppose that there are two projects, A and B, n=1, K=10%, their investment outlays and NCF are presented in the following table. Project I0 NCF1 NPV (k=10%) IRR PVI A 5,000 8,000 2,273 60% % B 50,000 75,000 18,182 50% % Both projects are acceptable due to their positive values of NPV, however, given that the two projects are mutually exclusive, which one is preferred? Also, because the size of investment outlays for A and B are different. By NPV, A is better than B。 COF=cash outflows。 given that state 2 in the first period happens, it is possible for the project to have either NCF=$2023 with 50% probability or NCF=$1000 with 50% probability. The questions is that under such a uncertainty, what is expected NPV and its risk (standard deviation)? Period State NCF Probability Period State NCF Probability 1 10000 70% 1 7000 90% 2 9000 30% 1 2 1 2023 50% 2 2023 10% 2 1000 50%廈門大學(xué)吳世農(nóng)(a) Find possible binations of NCFs Combination of NCFs Probability for Combination $7000, $10000 (90%)(70%)=63% $7000, $9000 (90%)(30%)=27% $2023, $2023 (10%)(50%)=5% $2023, $1000 (10%)(50%)=5% Total 100%(b) Determine possible NPV for each bination State NPVj Probability 1 1000+7000()+10000()=4624 2 1000+7000()+ 9000()=3797