The Complete CFO Handbook

Chapter 15. Capital Budgeting Techniques

Agenda

Item 1	Explain the most commonly used capital budgeting techniques: net present value, profitability index, internal rate of return, modifed internal rate of return, payback period, discounted payback period.
Item 2	Understand the relation between the techniques used to evaluate and select projects, and the objectives of the company.
Item 3	Identify what factors a capital budgeting technique should consider in evaluating an investment.
Item 4	For a given capital budgeting technique, explain the rule for determining whether a project is acceptable and for how to select among mutually exclusive projects.
Item 5	Compare and contrast the capital budgeting techniques.
Item 6	Recognize the potential problems in applying the techniques and understand the appropriate techniques to use in selecting projects in cases when the project lives or risks are different, when choosing among mutually exclusive projects, or when making decisions when the capital budget is limited.
Item 7	Explain how the measures used for evaluating responsibility managers may confict with capital budgeting techniques, potentially leading to the selection of the wrong projects.
Item 8	Explain the problems associated with using capital budgeting to justify the adoption of new technologies.

The value of a company today is the present value of all its future cash flows, where these future cash flows come from assets that are already in place and from future investment opportunities. These ...