chapter 1 capital budgeting: financial appraisal of
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Capital Budgeting: FinancialAppraisal of Investment Projects
Welcome to the Power Point Presentation
Chapter 1
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Introduction
• Chapter 1 introduces the concept of capitalbudgeting, and sets out the structure of thebook.
• The important points are: Capital budgeting is the most significant
financial activity of the firm.
Capital budgeting determines the coreactivities of the firm over a long term future.
Capital budgeting decisions must be made
carefully and rationally.
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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 o n g T
S h o r t T
I n v e s t m
D e b t / E i
F i n a n c
D i v i d e n
D i v i d e
F i n a n c i a
W e a l t h
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Examples of ‘Long Term Assets’
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Aspects of Capital BudgetingCapital 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 asmaximizing an investment’s NetPresent Value: Ch 1
Requires calculating a project’s relevantcash flows: Ch 2
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Aspects of Capital Budgeting
•Time series analysis by the applicationof simple and multiple regression, andmoving averages:Ch 3
Capital Budgeting Uses:
Sophisticated forecasting techniques:-
•Qualitative forecasting by theapplication of various techniques, suchas the Delphi method:Ch 4.
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Aspects of Capital Budgeting
Capital Budgeting requires:
Application of time value of moneyformulae: Ch 5
Application of NPV analysis to
forecasted cash flows: Ch 6
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Aspects of Capital Budgeting
Application of optimization techniquesto projects which have constrainedresources: Ch 11,12.
Development and application of genericand specific financial models: Ch 13.
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Summary of This Book
• This textbook proceeds from the basic tothe advanced.
• All chapters emphasize the firms’ goal of wealth maximization.
• All chapters deal with aspects of capitalbudgeting which help to achieve this goal.
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Summary of This Book
• All calculations are supported by Excelspreadsheets accessible on the Web
• Answers to all end of chapter review questions areavailable on the Web.
• These Power Point slides for all 16 chapters areavailable on the Web.