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!!!!

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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!

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Example 13.1

Solution only f

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Debt Financing

Short term borrowing from banks (term loans)

sale of long-term bonds (bond financing, includes floatation costs)

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Example 13.2

Solution only

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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)

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Cost of Capital

Cost of equity - opportunity cost, rate of return for stockholders

eqn bottom of 686

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Cost of Retained Earnings

all blue eqns on 687

with flotation costs

gfP

Dk

ce

)1(0

0

(13.2)

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Cost of Preferred Stock/Equity

Preferred Stock

equity

)1(*

*

ce fP

Dk

pere ckbkaki

(13.3)

(13.4)

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Example 13.4

Solution only

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Cost of Debt

Specific cost of debt component

)1()1()1( mbmsd tkdtdki (13.5)

Blue part of 691

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Calculating the Cost of Capital Weighted Average

example 13.6

V

Ci

V

Cik eedd (13.6)

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Choice of MARR

One value is NOT always right

If Project Financing Known

page 694

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MARR when financing unknown

Depreciation Expenses under Inflation

page 695 and 696

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MARR under Capital Rationing Page 699 - comments

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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

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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)