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Capital Budgeting: FinancialAppraisal of Investment Projects

Welcome to the Power Point Presentation

Chapter 1

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Introduction

Chapter 1 introduces the concept of capitalbudgeting, and sets out the structure of thebook.

The important points are:Capital budgeting is the most significantfinancial activity of the firm.

Capital budgeting determines the coreactivities of the firm over a long term future.Capital budgeting decisions must be made

carefully and rationally.

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Ex amples of Long Term Assets

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Aspects of Capital BudgetingCapital Budgeting involves:

Committing significant resources.

Planning for the long term: 5 to 50 years.Decision making by senior management.Forecasting long term cash flows.

E stimating long term discount rates.

Analyzing risk.

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Aspects of Capital Budgeting

Capital Budgeting:E mphasize the firms goal of wealthma x imization, which is e x pressed asma x imizing an investments NetPresent Value: Ch 1

Requires calculating a projects relevantcash flows: Ch 2

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Aspects of Capital Budgeting

Time series analysis by the applicationof simple and multiple regression, andmoving averages:Ch 3

Capital Budgeting Uses:

Sophisticated forecasting techniques:-

Qualitative forecasting by theapplication of various techniques, suchas the Delphi method:Ch 4.

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Aspects of Capital Budgeting

Capital Budgeting requires:

Application of time value of moneyformulae: Ch 5

Application of NPV analysis toforecasted cash flows: Ch 6

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Aspects of Capital Budgeting

Application of Sensitivity and Break E ven analyses to analyze risk:Ch 8.Application of Simulation and MonteCarlo Analysis as e x tra risk analysis:Ch 9.

Application of long term forecastingand risk analysis to projects with very

long lives:Ch 10.

Risk Analysis RADR and C E : Ch 7

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Aspects of Capital Budgeting

Application of optimization techniquesto projects which have constrainedresources: Ch 11,12.

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

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Summary of This Book

This te x tbook proceeds from the basicto the advanced.

All chapters emphasize the firms goalof wealth ma x imization.

All chapters deal with aspects of capital budgeting which help to achievethis goal.

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Summary of This Book

All calculations are supported by Excelspreadsheets accessible on the Web

Answers to all end of chapter reviewquestions are available on the Web.

These Power Point slides for all 1 6 chapters are available on the Web.

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