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Chapter 1

Capital Budgeting: Financial


Appraisal of Investment Projects

Welcome to the Power Point Presentation

1
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. 2
Capital Budgeting Within The Firm
T h e P o s i t i o n o f C a

F i n a n c i a l G o a l o
W e a l t h M a x i m i s

I n v e s t m e nF t i n D a e n c c i is Dn o gi vn iD d e cn

L o n g T e S r hm o rA t s T s e eD r t mes b A t / sE s q De u t i isv t yi d Me nixd

C a p i t a l B u d g e t i n g
3
Examples of ‘Long Term Assets’

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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.
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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
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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. 7
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

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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. 9
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.
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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.
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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.
12
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.

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