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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Relevant Cash Flows The cash flows that should be included in a capital budgeting analysis are those that will only occur 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler 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 “part of it”, then we should include the part that occurs because of the project 9- Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Common Types of Cash Flows Sunk costs – costs that have accrued | 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler 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 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & Jordan Slides prepared by Rowan Trayler Relevant Cash Flows The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is
