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Lecture Essentials of corporate finance (2/e) – Chapter 9: Making capital investment decisions

The topic discussed in this chapter is making capital investment decisions. In this chapter, you will learn: Understand how to determine the relevant cash flows for a proposed investment, understand how to analyse a project’s projected cash flows, understand how to evaluate an estimated NPV. | Making capital investment decisions Chapter 9 Key concepts and skills Understand how to determine the relevant cash flows for a proposed investment Understand how to analyse a project’s projected cash flows Understand how to evaluate an estimated NPV 9- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Chapter outline Project cash flows: A first look Incremental cash flows Pro forma financial statements and project cash flows More on project cash flow Evaluating NPV estimates Scenario and other what-if analyses Additional considerations in capital budgeting 9- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Relevant cash flows The cash flows that should be included in a capital budgeting analysis are those that will occur only if the project is accepted. These cash flows are called incremental cash flows. The stand-alone principle allows us to analyse each project in isolation from the firm, simply by focusing on incremental cash flows. 9- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Incremental cash flows—The difference between a firm’s future cash flows with a project and without the project. Stand-alone principle—The assumption that evaluation of a project may be based on the project’s incremental cash flows. Asking the right question You should always ask yourself ‘Will this cash flow occur ONLY if we accept the project?’ If the answer is ‘yes’, it should be included in the analysis because it is incremental. If the answer is ‘no’, it should not be included in the analysis because it will occur anyway. If the answer is ‘in part’, then we should include the part that occurs because of the project. 9- . | Making capital investment decisions Chapter 9 Key concepts and skills Understand how to determine the relevant cash flows for a proposed investment Understand how to analyse a project’s projected cash flows Understand how to evaluate an estimated NPV 9- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Chapter outline Project cash flows: A first look Incremental cash flows Pro forma financial statements and project cash flows More on project cash flow Evaluating NPV estimates Scenario and other what-if analyses Additional considerations in capital budgeting 9- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Relevant cash flows The cash flows that should be included in a capital budgeting analysis are those that will occur only if the project is .