CHAPTER 26: CAPITAL BUDGETING ANALYSIS What is Capital Budgeting? Is it riskier or less risky than managing ongoing operations? Methods Not Using Present Value Methods Using Present Value Payback Accounting Rate of Return Net Present Value Internal Rate of Return Evaluation Methods Project Payback (Non-Present Value) ARR (Non-Present Value) NPV IRR years years Assume you are evaluating two projects. You can select only one of them as they both do the same thing. Evaluate them first using non-present value methods, then using the present value methods. Cost Expected life Expected residual value Project A $560,000 4 years S0 Project B $900,000 4 years $0 Project A Annual Proiect B Annual Expected Returns Year 1 Year 2 Year 3 Year 4 Net Cash Flow $150,000 190,000 220,000 224,000 Net Income $10,000 50,000 80,000 84,000 Income Cash Flow 100,000 $325,000 100,000 325,000 100,000 325,000 100,000 325,000 What could be causing the difference between the annual income and net annual cash flows each year for each project? Hint: It's something you calculate for all fixed assets used in the business