CAPITAL BUDGETING II

1
CAPITAL BUDGETING II

• ADDITIONAL TOPICS AND ISSUES

2
CAPITAL BUDGETING ISSUES

• CASH FLOW ESTIMATION I
• What cash flows are relevant?
• Changes in required net working capital
• Pre-tax or post-tax?
• The importance of depreciation
• Project side-effects/cannibalization
• What cash flows are not relevant?
• Accounting net income
• Opportunity costs and sunk costs

3
CAPITAL BUDGETING ISSUES

• CASH FLOW ESTIMATION II
• NPV PV(Project cash inflows) PV(Project cash
  outflows)
• Defining Project Cash Flow
• Project CF Project OCF - ? Net Cap. Sp. - ?
  Project NWC
• where
• Project OCF
• Project OCF
• Project OCF
• Project OCF

4
CAPITAL BUDGETING ISSUES

• PROJECT RISK ASSESSMENT
• Cash flow projections point estimates vs.
  distributions of outcomes
• Forecasting risk
• Methods of What-If Analysis
• Sensitivity analysis
• Scenario analysis
• Simulation analysis

5
CAPITAL BUDGETING ISSUES

• MANAGERIAL OPTIONS IN PROJECT ANALYSIS
• Capacity options
• Abandonment
• Expansion
• Toehold investments
• Flexibility options
• Raw materials/inputs
• Production technology
• When is it an appropriate risk measure?
• Outputs
• Estimating the value of real options

6
CAPITAL BUDGETING ISSUES

• CAPITAL RATIONING
• Definition Capital rationing
• Soft rationing
• Hard rationing
• Capital rationing and project evaluation
• Implications for analysis
• 1.
• 2.

7
CAPITAL BUDGETING ISSUES

• SOURCES OF PROJECT VALUE-AGAIN
• Real Asset Markets and Financial Asset Markets
• Capital Budgeting is Not Security Analysis