4: Capital Budgeting
- Page ID
- 163164
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 4.1: Capital Budgeting Fundamentals
- This page covers capital budgeting, highlighting its significance in strategic decision-making and long-term financial planning. It discusses processes and methods such as non-discounted cash flow techniques (payback period) and discounted cash flow methods (NPV and IRR) for assessing investments.
- 4.2: Capital Budgeting Concepts and Process
- This page outlines capital budgeting, an essential process for assessing major business investments to improve company value. It covers steps such as identifying investment opportunities, estimating cash flows, evaluating projects with financial metrics, conducting risk analysis, and monitoring results.
- 4.3: Non-Discounted Cash Flows (DCF) Capital Budgeting Techniques
- This page covers non‑discounted cash flow capital budgeting techniques, focusing on the payback period and accounting rate of return (ARR). It details their calculation methods, advantages, and limitations, including simplicity and liquidity measures.
- 4.4: Discounted Cash Flows (DCF) Capital Budgeting Techniques
- This page covers Discounted Cash Flow (DCF) techniques, focusing on Net Present Value (NPV) and Internal Rate of Return (IRR) for evaluating long-term investments. NPV analyzes cash inflows versus outflows to assess project viability, while IRR indicates the discount rate where NPV is zero.
- 4.5: Capital Rationing and Project Selection
- This page covers capital rationing, where firms prioritize investment opportunities due to resource limitations. It introduces the Profitability Index (PI) for project evaluation, outlining steps for selecting projects: calculating PI, ranking them, allocating capital, and creating a value-maximizing bundle.
- 4.6: Capital Budgeting Applications
- This page outlines essential learning objectives in capital budgeting, focusing on estimating project cash flows, assessing risk, and using quantitative tools for project analysis.
- 4.7: Estimate Project Cash Flows
- This page focuses on estimating project cash flows in capital budgeting, emphasizing the difference between accounting profit and cash flow. It defines incremental cash flows as essential for assessing a project's financial viability, detailing components like initial investment, operating cash flows, and terminal cash flows while excluding non-incremental cash flows.
- 4.8: Estimate Project Risk and the Discount Rate
- This page underscores the significance of the discount rate in capital budgeting for assessing future cash flows and meeting investor return expectations.
- 4.9: Analyse Project Risk Using Quantitative Tools
- This page emphasizes the significance of risk analysis in capital budgeting to reduce uncertainty in cash flow estimates. It discusses key tools such as sensitivity and scenario analysis, which evaluate the impact of changing assumptions on financial outcomes like NPV and IRR.
- 4.10: Real Options in Capital Budgeting
- This page covers real options in capital budgeting, emphasizing their role in managing uncertainty and enhancing value through flexibility compared to traditional methods. Key options such as expansion, abandonment, and delay enable companies to adapt to market changes.
- 4.11: Summary
- This page provides a summary of the chapter.