Lecture Business finance - Chapter 6: The application of project evaluation methods

Chapter 6 The Application of Project Evaluation Methods Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 6–1 Prepared by Dr Buly Cardak Learning Objectives • Explain the principles used in estimating project cash flows. • Compare mutually exclusive projects that have different lives. • Determine when to retire (abandon) or replace assets. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 6–2 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Use sensitivity analysis and break-even analysis to analyse project risk. • Use decision trees to analyse sequential decisions. • Explain the role of qualitative factors in project selection. • Explain the effects of resource constraints on project selection. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 6–3 Prepared by Dr Buly Cardak Introduction • Practical project evaluation has to accommodate: – Uncertainty with respect to the cash flows. – Uncertainty with respect to the estimation of the project’s required rate of return. – The existence and implications of taxes. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 6–4 Prepared by Dr Buly Cardak Application of the Net Present Value Method • Estimation of cash flows in project evaluation – Exclude financing charges The required rate of return used to discount cash flows incorporates the cost of equity and debt. Including financing charges in the cash flows would be double counting. – Focus on incremental cash flows Is it a cash item? Will the amount of the item change if the project is undertaken? Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 6–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn