1 Capital Budgeting: Financial Appraisal of Investment Projects Welcome to the Power Point Presentation Chapter 1.

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Presentation transcript:

1 Capital Budgeting: Financial Appraisal of Investment Projects Welcome to the Power Point Presentation Chapter 1

2 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.

3 Capital Budgeting Within The Firm

4 Examples of ‘Long Term Assets’

5 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.

6 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 Requires calculating a project’s relevant cash flows: Ch 2

7 Aspects of Capital Budgeting Time series analysis by the application of simple and multiple regression, and moving averages:Ch 3 Capital Budgeting Uses: Sophisticated forecasting techniques:- Qualitative forecasting by the application of various techniques, such as the Delphi method:Ch 4.

8 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

9 Aspects of Capital Budgeting 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. Risk Analysis – RADR and CE: Ch 7

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.

11 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.

12 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 this goal.

13 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