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 T h e P o s i t i o n o f C a p i t a l B u d g e t i n g C a p i t a l B u d g e t i n g L o n g T e r m A s s e t s S h o r t T e r m A s s e t s I n v e s t m e n t D e c i s o n D e b t / E q u i t y M i x F i n a n c i n g D e c i s i o n D i v i d e n d P a y o u t R a t i o D i v i d e n d D e c i s i o n F i n a n c i a l G o a l o f t h e F i r m : W e a l t h M a x i m i s a t i o n 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. [...]...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 11 Summary of This Book • This textbook proceeds from the basic to the advanced • All chapters emphasize the firms’ goal of wealth maximization... 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 . 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, . 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. 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: