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Corporate Financial Management 3e
Emery Finnerty Stowe
Business Investment Rules
Learning Objectives
Describe the process of capital budgeting.
Calculate various investment criteria.
Understand the strengths and weaknesses of NPV, IRR, and other investment criteria.
Explain why an NPV profile is the most useful investment criterion.
Chapter Outline
The Capital Budgeting Process
9. Present Value
Internal Rate of Return
Using the NPV and IRR
Other Capital Budgeting Criteria
Business Investment in Practice
Focus on Principles
Valuable Ideas
Look for new ideas to use as a basis for capital budgeting projects will create value
Comparative Advantage
Look for capital budgeting projects that will use the firm’parative advantage to create value.
Incremental benefits
Identify and estimate the expected future cash flows for a capital budget project on an incremental basis.
Focus on Principles
Risk-Return Trade-Off
Incorporate the risk of a capital budgeting project into its cost of capital—the project’s required return.
Time-Value-Of-Money
Measure the current value a capital budgeting project will create, its NPV.
Focus on Principles
Options
Recognize the value of options, such as the option to delay, expand, or abandon a project.
Two-Sided Transactions
Consider why the other party to a transaction is willing to participate.
Signaling
Consider the products and actions petitors.
The Capital Budgeting Process
Generating ideas for capital budgeting projects.
Reviewing existing projects and facilities.
Preparing proposals.
Evaluating proposed projects and creating the capital budget.
Preparing appropriation requests.
The process can be broken down into five steps as a project moves from idea to reality:
Generating ideas for capital budgeting projects
Research and Development
Division Management
Plant Management
Production Management
Strategic Planning
ideas
ideas
ideas
ideas
ideas
ideas
The Capital Budget
The capital bu