Chapter 17. Capital Budgeting Analysis

Chapter Learning Objectives:


  • 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.

  • 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.

Where We Have Been...

In Chapter 13, at the beginning of the financial management section of this book, we considered how firms will have a mission or vision statement—a reason for being. This current chapter will examine how firms can "put feet to their words" and make decisions to purchase fixed assets and pursue strategies to help them fulfill their mission. The previous two chapters examined how a firm should manage and finance its current assets. Now our focus will shift to fixed assets.

Where We Are Going...

Once a firm decides which fixed assets and corporate strategies to pursue, it must finance them. This will be the focus of Chapter 18, "Capital Structure and the Cost of Capital."

How Does This Chapter Apply to Me...

Capital budgeting analysis is a framework for evaluating all business decisions; it is not only a tool for the "financial" types. Proper analysis will identify relevant cash flows and an appropriate discount rate to reflect ...

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