(BQ) Part 2 book “Essentials of corporate finance” has contents: Capital budgeting, risk and return, long-term financing, short-term financial management, topics in business finance. | PA RT F I V E Capital Budgeting 8 Net Present Value and Other Investment Criteria I s there green in green? General Electric (GE) thinks so. Through its “Ecomagination” program, the company planned to double research and development spending on green products. In fact, by 2014, GE had already invested more than $12 billion in its Ecomagination program and announced it would invest another $10 billion by 2020. LEARNING OBJECTIVES After studying this chapter, you should be able to: LO 1 With products such as a hybrid railroad locomotive (described as a 200-ton, 6,000-horsepower “Prius on rails”), GE’s green initiative LO 2 seems to be paying off. Revenue from the company’s green products was more than $160 billion from 2005 to 2014. Further, revenues LO 3 from Ecomagination products were growing twice as fast as the company’s other revenues. GE’s internal commitment to reduced energy consumption through green “Treasure Hunts” saved it more than $100 million, and, by 2014, the company had reduced water con- Discuss accounting rates of return and some of the problems with them. Explain the internal rate of return criterion and its associated strengths and weaknesses. LO 4 Evaluate proposed investments by using the net present value criterion. LO 5 Apply the modified internal rate of return. sumption by 47 percent relative to its 2006 baseline, another considerable cost savings. Summarize the payback rule and some of its shortcomings. LO 6 While GE was in part motivated by the desire to go green, from a Calculate the profitability index and understand its relation to net present value. financial perspective the decision only makes sense if the company makes some green. Given that GE plans to spend about $2 billion per year on such undertakings, it is obviously a major financial decision, and the risks and rewards must be carefully weighed. In this chapter, we discuss the basic tools used in making such decisions. This
