ror | /” Module #19 Student Activity Name: Section: Schedule: ‘Lesson Title: Capital Budgeting (Part 1) ‘Learning Targets: At the end of this module, | should have: 4. Defined the concept of capital budgeting; 2. Differentiated independent and mutually exclusive projects 3. Calculated payback period, NPV, IRR. References: Timbang, F. (2016). Financial Management Part 2, Quezon City: C &E Publishing, inc. Brigham, E. F., Houston, J. F., Hsu, J-M., Kong, Y. K., & Bany- Aritfin, A. (2018). Essentials of Financial Management. Pasig City: Cengage Leaming Asia Pte. Ltd. Schweser. (2012). Schwesemotes CFA Level 1 Book 4: Comorate Finance, Portfolio Management, and Equity Investment. United States of America: Kapian, Inc. eS SRS tt A. LESSON PREVIEW/REVIEW os Welcome back! Let us review the lesson on the previous day. +4 What isthe formula in solving the Weighted Average Cost of Capitat? ELV x ke) 4 CDN» ka *CE TOD ‘What is the formula in solving the cost of debt? What is the formuta in solving the cost of preference shares? Ygreg oA > po What is the formula in solving the cost of newly issued common shares? Thie darumant ic the praparty af BHINMA EDUCATIONPHINMIA EDUCATION FIN 072 | Financial Markets Module #19 Student Activity Sheet Name: Class number Section: Schedule: Date: Skill-bullding Activities (with answer key) -Tesar Chemicals is considering Projects & and L, whose cash flows are shown below. These Projects Ste Trutuaily exclusive, equally sky, ana not repeatabie, The CEO pelleves tne IRF is fe foe seiection erterion, ret ths OFO advoeates the NEV. Ifthe decision is made by choosing the project with he higher IRR rather {than the one with the higher NPV, how much, if any, value will be forgone, ‘what's the chosen NP’ vata ‘the maximum possible NPV? Note that (1) “true value" is measured by NPV, and (2) under some cont the choice of IRR vs. NPV will have no effect on the value gained or lost. woe: 7.50% ° 7 7 3 4 ‘ear P100 or 2700 Peso pres 300 1,400 i/o 1 Yee \ vy 3e 4 me Es = 10 sh co los \eG Rea ae Cap aT WH TLL 444 Ger TpieSimenlehen. te = Us pe Broce Gomguetedle gatas Pat eves Bas saad ser B 4. 06% ARSE Yonan Inc. is considering Projects S and L., whose cash flows are shown below. These projects are mutually ealusive, equally risky, and not repeatablo. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some Conditions choosing projects on the basis of the shorter payback will not cause value to be lost. ‘WACC: 10.25% Year Ted sh geet che oe ete au eee 1 ea CFs $50 3600 3600 Eo 3 “Ch 62,100 $400 ‘$800 $800 $1,000 : - - This document is the property of PHINMA EDUCATIONr Understanding Because "present Value” refers to the value of cash flows that occur at different points in time, | @ series of present values of cash flows should not be summed to determine the value of a capital budgeting project. “Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of @ whose cash flows come in Jater in its life. ‘Other things held constant. an increase in the cost of capital will result in a decrease in a project's IRR. “The phenomenon called “muliple internal rates of relum” arises when two or more mutually exclusive projects that have different lives are being compared. For a project with one initial cash outflow followed by a series of positive cash inflows. the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the projects fi ing those compounded cash flows te f termina! value (TV), and then [ finding the discount rate that causes the PV of the TV to equal the project's cost. so z ie is a2S5 \ i i =S i C. LESSON WRAP-UP Frequently Asked Questions re the + Stand-alone risk + Corporate risk + Market risk 2. What is stand-alone risk?