Engineering Economy
IEN255 Chapter 13 - Capital Budgeting Decisions Capital Budgeting - involves decisions
related to fixed assets
Capital Budgeting - the whole process
Choice of financing, schedule of investment opportunities, and estimate of MARR
Budgeting!!!!Budgeting!!!!
Engineering Economy
Methods of Financing
Investment not independent of source of financing
Equity financing use of retained earnings otherwise paid
to stockholders issuance of stock
cost associated with issue (flotation cost)
raise capital to finance projects!
Engineering Economy
Example 13.1
Solution only f
Engineering Economy
Debt Financing
Short term borrowing from banks (term loans)
sale of long-term bonds (bond financing, includes floatation costs)
Engineering Economy
Example 13.2
Solution only
Engineering Economy
Capital structure
•Debt Ratio (Capital structure)- percentage of total capital provided by borrowed funds
•Target Debt Ratio - firm’s desired ratio (if actual debt ratio is below target level, any new capital will probably raised by issuing new debt)
Engineering Economy
Cost of Capital
Cost of equity - opportunity cost, rate of return for stockholders
eqn bottom of 686
Engineering Economy
Cost of Retained Earnings
all blue eqns on 687
with flotation costs
gfP
Dk
ce
)1(0
0
(13.2)
Engineering Economy
Cost of Preferred Stock/Equity
Preferred Stock
equity
)1(*
*
ce fP
Dk
pere ckbkaki
(13.3)
(13.4)
Engineering Economy
Example 13.4
Solution only
Engineering Economy
Cost of Debt
Specific cost of debt component
)1()1()1( mbmsd tkdtdki (13.5)
Blue part of 691
Engineering Economy
Calculating the Cost of Capital Weighted Average
example 13.6
V
Ci
V
Cik eedd (13.6)
Engineering Economy
Choice of MARR
One value is NOT always right
If Project Financing Known
page 694
Engineering Economy
MARR when financing unknown
Depreciation Expenses under Inflation
page 695 and 696
Engineering Economy
MARR under Capital Rationing Page 699 - comments
Engineering Economy
Capital Budgeting
Terms (independent and dependent projects)
Formulation
Independent Mutually Exclusive table at top of 702 table middle of
702
contingent table at bottom of 702
Engineering Economy
Capital Budgeting w/ limited budgets
Solution a) on pg 704 and 705
Engineering Economy
Capital Budgeting w/ limited budgets
figure 13.5 and table 13.5
Engineering Economy
IEN255 Summer’99 Chapter 10,11,13 HW#4
Homework Assignment:Chapter 10#’s 10.4; 10.6; 10.24Chapter 11#’s 11.1; 11.6; 11.13Chapter 13#’s 13.9
Due together (Tues July 27)