Because a firm must continually evaluate possible investments, capital budgeting is an ongoing process. However, before a firm begins thinking about capital budgeting, it must first determine its corporate strategy its broad set of objectives for future investment. For example, the Walt Disney Companys objective is to be the worlds premier family entertainment company through the ongoing development of its powerful brand and character franchises.

So, when you introduce a new product, you are really interested in how it changes the sales of the entire firm (that is, the incremental sales), rather than the sales of the new product alone. So, when a firm undertakes a new project, the financial man- agers want to know how it changes the firms total revenues, not merely the new products revenues.

The compensation for the time value of money includes compensation for any anticipated inflation. We typically use a risk- free rate of interest, such as the yield on a long-term U.S. Treasury bond, to represent the time value of money.

As you can tell, altering the firms cost of capital to reflect a projects cost of capital requires judgement. How much do we adjust it. If the project is riskier than the typical project do we add 2%? 4%? 10%? There is no prescription here. It depends on the judgement and experience of the decision-maker.