Analysis of potential projects.
Long-term decisions; involve large
expenditures.
Very important to firm’s future.
9 - 3
Steps in Capital Budgeting
Estimate cash flows (inflows &
outflows).
Assess risk of cash flows. Assess risk of cash flows.
Determine r = WACC for project.
Evaluate cash flows.
9 - 4
What is the difference between
independent and mutually exclusive
projects?
Projects are:
independent, if the cash flows of independent, if the cash flows of
one are unaffected by the
acceptance of the other.
mutually exclusive, if the cash flows
of one can be adversely impact