Chapter 1 Capital Budgeting: Financial Appraisal of Investment Projects

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. Capital budgeting determines the core activities of the firm over a long term future. • The important points are: Capital budgeting is the most significant financial activity of the firm.Introduction • Chapter 1 introduces the concept of capital budgeting. Capital budgeting decisions must be made 2 carefully and rationally. and sets out the structure of the book.

Capital Budgeting Within The Firm The Position of Capital Budgeting Financial Goal of the Firm: Wealth Maximisation Investment Decison Long Term Assets Short Term Assets Financing Decision Debt/Equity Mix Dividend Decision Dividend Payout Ratio Capital Budgeting 3 .

Examples of ‘Long Term Assets’ 4 .

Estimating long term discount rates.Aspects of Capital Budgeting Capital Budgeting involves: Committing significant resources. 5 . Forecasting long term cash flows. Planning for the long term: 5 to 50 years. Analyzing risk. Decision making by senior management.

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 Requires calculating a project’s relevant cash flows: Ch 2 6 .

such as the Delphi method:Ch 4.Aspects of Capital Budgeting Capital Budgeting Uses: Sophisticated forecasting techniques:•Time series analysis by the application of simple and multiple regression. 7 . and moving averages:Ch 3 •Qualitative forecasting by the application of various techniques.

Aspects of Capital Budgeting Capital Budgeting requires: Application of time value of money formulae: Ch 5 Application of NPV analysis to forecasted cash flows: Ch 6 8 .

Application of Simulation and Monte Carlo Analysis as extra risk analysis:Ch 9.Aspects of Capital Budgeting Risk Analysis – RADR and CE: Ch 7 Application of Sensitivity and Break Even analyses to analyze risk:Ch 8. 9 . Application of long term forecasting and risk analysis to projects with very long lives:Ch 10.

12. Development and application of generic and specific financial models: Ch 13. 10 .Aspects of Capital Budgeting Application of optimization techniques to projects which have constrained resources: Ch 11.

11 .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.

• All chapters emphasize the firms’ goal of wealth maximization.Summary of This Book • This textbook proceeds from the basic to the advanced. • All chapters deal with aspects of capital budgeting which help to achieve this goal. 12 .

...... 13 .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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