上海财经大学杨葵Corporation Finance-Less06-1

The capital budgeting process Capital budgeting is the most important decision for several reasons: The size of the cash flows involved These decisions affect the quality of life The capital budgeting decision is quite timetime-consuming

The capital budgeting process Three major administrative areas: 1 Project generation Innovation and sensitivity to consumer needs competitive advantage costcost-reduction Sustained profitability

The capital budgeting process Three major administrative areas: 2 Project approval The organizational level that can approve capital budgeting requests varies with the size and g g q importance of the expenditure Detailed cash flow estimates and other relevant information accompany each project request costcostreduction Headquarters considers non-economic implications nonof the project, potential problems between project requests, funding requirements for all accepted projects, and other factors

The capital budgeting process Three major administrative areas: 3 Project follow-up followmonitoring of projects avoiding conflicts of interest

The capital budgeting process A typical capital budgeting analysis consists of: estimating project cash flows determining the economic value of the project by: categorizing the risk profile of the project

assigning a discount rate to evaluate the project calculating the NPV of the project, or applying an alternative criterion

Estimating cash flows Important rules in estimating cash flows Use actual cash flows, not accounting income flows, Use incremental cash flows by: ignoring sunk costs including opportunity costs

Use nominal cash flows Use after-tax cash flows after-