capital budgeting financial appraisal of investment projects

1
Capital Budgeting: Financial
Appraisal of Investment Projects
Welcome to the Power Point Presentation
Chapter 1
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.
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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
C a p i t a l B u d g e t i n g
L o n g T e r m A s s e t s
S h o r t T e r m A s s e t s
I n v e s t m e n t D e c i s o n
D e b t / E q u i t y M i x
F i n a n c i n g D e c i s i o n
D i v i d e n d P a y o u t R a t i o
D i v i d e n d D e c i s i o n
F i n a n c i a l G o a l o f t h e F i r m :

W e a l t h M a x i m i s a t i o n
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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.
Analyzing risk.
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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
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Aspects of Capital Budgeting
•
Time series analysis by the application
of simple and multiple regression, and
moving averages:Ch 3
Capital Budgeting Uses:
Sophisticated forecasting techniques:-
•

Qualitative forecasting by the
application of various techniques, such
as the Delphi method:Ch 4.
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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
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Aspects of Capital Budgeting
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.
Risk Analysis – RADR and CE: Ch 7
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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.
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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.
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Summary of This Book
•
This textbook proceeds from the basic
to the advanced.
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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.
. . . . . . . . .