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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 significant

financial 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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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 o n g T

S h o r t T

I n v e s t m

D e b t / E i

F i n a n c

D i v i d e n

D i v i d e

F i n a n c i a

W e a l t h

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Examples 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.

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 asmaximizing an investment’s NetPresent Value: Ch 1

Requires calculating a project’s 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 to

forecasted cash flows: Ch 6

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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 textbook proceeds from the basic tothe advanced.

• All chapters emphasize the firms’ goal of wealth maximization.

• All chapters deal with aspects of capitalbudgeting which help to achieve this 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 review questions areavailable on the Web.

• These Power Point slides for all 16 chapters areavailable on the Web.