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.

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