Chapter 1 Capital Budgeting: Financial Appraisal of Investment Projects

Welcome to the Power Point Presentation

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 2 carefully and rationally.

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

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.
Analyzing risk.
5

Aspects of Capital Budgeting

Capital Budgeting: Emphasize the firms goal of wealth maximization, which is expressed as maximizing an investments Net Present Value: Ch 1

Requires calculating a projects relevant cash flows: Ch 2

6

Aspects of Capital Budgeting

Capital Budgeting Uses:
Sophisticated forecasting techniques: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
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.

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.

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

10

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.
12

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.

.........

13