Financial Management, 12th Edition by Pearson

CHAPTER 12

Risk Analysis in Capital Budgeting

LEARNING OBJECTIVES

• Demonstrate the calculations and usefulness of probability, expected value, standard deviation and coefficient of variation in capital budgeting.
• Illustrate how risk-adjusted discount rate and certainty equivalent are used to handle risk in capital budgeting.
• Calculate DCF break-even point.
• Perform scenario analysis in a capital budgeting project and explain its benefits.
• Analyse a capital budgeting project by a simple simulation model in Excel.
• Draw a decision tree to analyse a capital budgeting project and show necessary calculations.
• Explain utility theory and its practical use in capital budgeting.

INTRODUCTION

In discussing the capital budgeting techniques, we have ...