Capital Budgeting: Financial Appraisal of Investment Projects

1
Capital Budgeting Financial Appraisal of
Investment Projects
Chapter 1

• Welcome to the Power Point Presentation

2
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.

3
Capital Budgeting Within The Firm
4
Examples of Long Term Assets
5
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.
6
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
7
Aspects of Capital Budgeting
Capital Budgeting Uses
Sophisticated forecasting techniques-

• Time series analysis by the application of simple
  and multiple regression, and moving averagesCh 3

• Qualitative forecasting by the application of
  various techniques, such as the Delphi methodCh
  4.

8
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
9
Aspects of Capital Budgeting
Risk Analysis RADR and CE Ch 7
Application of Sensitivity and Break Even
analyses to analyze riskCh 8.
Application of Simulation and Monte Carlo
Analysis as extra risk analysisCh 9.
Application of long term forecasting and risk
analysis to projects with very long livesCh 10.
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.
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.
12
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.

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.

. . . . . . . . .