Introductory Capital Budgeting Remarks
- Capital budgeting is the diligence process that a company performs to determine what investment projects it will undertake.
- Application of these principles is relevant as an internal corporate finance analyst or as an external debt or equity analyst at a financial services company.
- Theoretically, a company will only commence projects which are expected to increase the firm’s value.
- Value of a capital project = present value of expected after tax cash flows, discounted at an appropriate risk adjusted rate.
- Discount Rate: commonly the firm’s marginal weighted average cost of capital (WACC), however in certain circumstances it may be appropriate to revise WACC depending on a project’s increased or decreased exposure to market risk.