Chapter 1 Capital Budgeting: Financial Appraisal of Investment Projects Welcome to the Power Point Presentation
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.
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.
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 Requirescalculating a project’s relevant cash flows: Ch 2
Aspects of Capital Budgeting Capital Budgeting Uses: Sophisticated forecasting techniques:- • Time series analysis by the application of simple and multiple regression, and moving averages:Ch 3 • Qualitative forecasting by the application of various techniques, such as the Delphi method:Ch 4.
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
Aspects of Capital Budgeting Risk Analysis – RADR and CE: Ch 7 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.
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.
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.
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 thisgoal.
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. . . . . . . . . .