Capital Budgeting: Financial Appraisal of Investment Projects

Chapter 1 Capital Budgeting: Financial Appraisal of Investment Projects

Welcome to the Power Point Presentation

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Introduction

• Chapter 1 introduces the concept of capital budgeting, and sets out the structure of the book.

• The important points are: Capital budgeting is the most significant

financial activity of the firm.

Capital budgeting determines the core

activities of the firm over a long term future.

Capital budgeting decisions must be made

carefully and rationally.

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Capital Budgeting Within The Firm

T h e   P o s i t i o n   o f   C a p i t a l   B u d g e t i n g

F in a n c ia l G o a l o f t h e F ir m : W e a lt h M a x im is a t io n

I n v e s t m e n t D e c is o n

F in a n c in g D e c is io n

D iv id e n d D e c is io n

L o n g T e rm A s s e ts

S h o r t T e r m A s s e ts

D e b t / E q u it y M ix

D iv id e n d P a y o u t R a t io

C a p i t a l B u d g e t i n g

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Examples of ‘Long Term Assets’

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Aspects of Capital Budgeting

Capital Budgeting involves: Committing significant resources.

Planning for the long term: 5 to 50 years.

Decision making by senior management. Forecasting long term cash flows.

Estimating long term discount rates.

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Analyzing risk.

Aspects of Capital Budgeting

Capital Budgeting: Emphasize the firm’s goal of wealth maximization, which is expressed as maximizing an investment’s Net Present Value: Ch 1

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Requires calculating a project’s relevant cash flows: Ch 2

Aspects of Capital Budgeting

Capital Budgeting Uses:

Sophisticated forecasting techniques:-

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•Time series analysis by the application of simple and multiple regression, and moving averages:Ch 3 •Qualitative forecasting by the application of various techniques, such as the Delphi method:Ch 4.

Aspects of Capital Budgeting

Capital Budgeting requires:

Application of time value of money formulae: Ch 5

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Application of NPV analysis to forecasted cash flows: Ch 6

Aspects of Capital Budgeting

Risk Analysis – RADR and CE: Ch 7

Application of Sensitivity and Break Even analyses to analyze risk:Ch 8. Application of Simulation and Monte Carlo Analysis as extra risk analysis:Ch 9.

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Application of long term forecasting and risk analysis to projects with very long lives:Ch 10.

Aspects of Capital Budgeting

Application of optimization techniques to projects which have constrained resources: Ch 11,12.

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Development and application of generic and specific financial models: Ch 13.

Aspects of Capital Budgeting

Application of cash flow forecasting, and NPV analysis to all aspects of property investment projects: Ch 14,15

Application of NPV analysis under the additional risks associated with international investments: Ch 16. 11

Summary of This Book

• This textbook proceeds from the basic

to the advanced.

• All chapters emphasize the firms’ goal

of wealth maximization.

• All chapters deal with aspects of capital budgeting which help to achieve this goal.

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Summary of This Book

• All calculations are supported by Excel

spreadsheets accessible on the Web

• Answers to all end of chapter review questions are available on the Web.

• These Power Point slides for all 16 chapters are available on the Web. . . . . . . . . .

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