Chapter 17 - Capital budgeting analysis. This chapter includes contents: Explain how the capital budgeting process should be related to a firm’s mission and strategies, identify and describe the five steps in the capital budgeting process, identify and describe the methods or techniques used to make proper capital budgeting decisions,. | Chapter 17 Capital Budgeting Analysis © 2011 John Wiley and Sons Chapter Outcomes Explain how the capital budgeting process should be related to a firm’s mission and strategies. Identify and describe the five steps in the capital budgeting process. Identify and describe the methods or techniques used to make proper capital budgeting decisions. Chapter Outcomes, continued Explain how relevant cash flows are determined for capital budgeting decision purposes. Discuss how a project’s risk can be incorporated into capital budgeting analysis. Capital Budgeting Projects Seek investment opportunities to enhance a firm’s competitive advantage and increase shareholder wealth Typically long-term projects Should be evaluated by time value of money techniques Large investment Relate to firm’s mission Mutually exclusive versus independent Identifying Potential Capital Budget Projects Time value concepts tell us: Value = present value of expected cash flows Separating out the initial up-front cost, we have: Net Present Value = Present value of expected cash flows – cost of project Identifying Potential Capital Budget Projects Net Present Value = Present value of expected cash flows – cost of project If NPV >0 the project adds value to the firm. Where do firms find attractive capital budgeting projects with potentially positive NPVs? Identifying Potential Capital Budget Projects Planning tools: MOGS: Mission, Objectives, Goals, Strategies SWOT: (Internal to firm):Strengths, Weaknesses (External to firm): Opportunites, Threats Capital Budgeting Process Identification Development Selection Implementation Follow-up Data Needs Economic and Political Data Financial Data Non-Financial Data Oil/Gas Company Projects Ranking of items from most to least important on capital spending: Natural gas price forecast Crude oil price forecast Natural gas demand forecast Crude oil demand forecast Availability and cost of capital Regulatory requirements on . | Chapter 17 Capital Budgeting Analysis © 2011 John Wiley and Sons Chapter Outcomes Explain how the capital budgeting process should be related to a firm’s mission and strategies. Identify and describe the five steps in the capital budgeting process. Identify and describe the methods or techniques used to make proper capital budgeting decisions. Chapter Outcomes, continued Explain how relevant cash flows are determined for capital budgeting decision purposes. Discuss how a project’s risk can be incorporated into capital budgeting analysis. Capital Budgeting Projects Seek investment opportunities to enhance a firm’s competitive advantage and increase shareholder wealth Typically long-term projects Should be evaluated by time value of money techniques Large investment Relate to firm’s mission Mutually exclusive versus independent Identifying Potential Capital Budget Projects Time value concepts tell us: Value = present value of expected cash flows Separating out the .
