Overview and Objectives

Welcome to Part 4 of the 'Money Flow' Module!

This section of our online course will introdue you to capital budgeting and determining the relevant cash flows for investment decisions.

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There are two purposes of Part 4 of the Money Flow Lesson

(1) To describe the generalities of capital budgeting and to explain the method as a process, and:

(2) To identify and explain the relevant cash flows necessary to apply capital budgeting techniques.The actual numerical capital budgeting techniques will be described at the end of the lesson.

By the time you are finished with Part 4, you should understand the following:

• The nature and benefits of capital budgeting
• Reasons why accurate capital budgeting is important
• Chief motives for making capital expenditures
• Capital budgeting as a process
• Expansion versus replacement projects
• The importance of sales and cost forecasts
• Independent versus mutually exclusive projects
• The importance of net incremental cash flow analysis
• Sunk versus opportunity costs
• How to identify the three relevant cash flow categories: the initial investment, net operating cash flows, terminal value
• How the weighted average cost of capital is used in making appropriate capital expenditure decisions
• What Present Value means, how it is computed, and why it is necessary for the calculation of the Net Present Value (NPV) and the Internal Rate of Return (IRR) methods
• The relationship between the Net Present Value and Internal Rate of Return methods
• Understand the reinvestment rate assumptions for NPV and IRR
• Make a general overall comparison of the three capital budgeting methods and determine which one is "best" and why.

 

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